China‘s consumer price index (CPI) rose above trend in August, fueled by a continued surge in food costs and weather-related supply shortages.
Factory-gate prices, expressed by the producer price index (PPI), told a completely different story. The PPI gauge plunged deeper into deflation last month, the result of a bitter trade war with the United States.
CPI Inflation Remains Steady
The National Bureau of Statistics reported Tuesday that China’s CPI rose 0.7% in August, up from 0.4% in July. Annually, that translated into a gain of 2.8%, unchanged from the month before and matching the largest increase since early 2018.
Surging pork prices have been a major catalyst behind the noticeable uptick in CPI recently. In the last two months, CPI has been well above the trend rate of 2.3% through the first seven month of 2019.
Factory Gate Prices Crumble
China’s PPI indicator, long viewed as a gauge of corporate profitability, extended its slide in August, falling 0.8% annually. That’s much steeper than July’s 0.3% contraction.
Producer prices are now deflating at the fastest pace in over three years, reflecting the tepid state of affairs for primary industries. Beijing’s ongoing trade war with the United States is largely to blame. Earlier this month, both countries slapped fresh duties on each other’s goods, raising the stakes in a bitter dispute over intellectual property and Chinese industrial policy.
U.S. Pays a Burden for the Trade War
China, once the linchpin of global economic growth, is weakening at a faster pace than previously feared. It was always assumed that the world’s second largest economy would unwind gradually as policymakers embarked on a soft pivot away from so-called smoke-stack industries toward consumption and services. The trade war has expedited the process, as evidenced by the sharp drop in foreign direct investment and imports.
What’s happening in China and around the world has had a direct impact on the United States. Trade uncertainty was central in the Federal Reserve‘s decision to lower interest rates, and why it will likely do so again next week.
Like China, the U.S. manufacturing sector has been hit especially hard. Last month, IHS Markit reported that U.S. manufacturing contracted in August for the first time in nearly a decade. Although Markit later revised its estimate to reflect meager growth, a more closely-watched indicator from the Institute for Supply Management (ISM) seemed to confirm that U.S. manufacturing was teetering on recession.
ISM’s manufacturing index fell below 50 in August, the first such feat in three years. Richard Curtin, the survey’s director, attributed the decline to concerns about tariffs.