(Bloomberg) — China’s inflation pressures moderated in December as commodity prices and food costs slid, giving policy makers scope to cut interest rates to cushion the economy’s downturn.

The producer price index rose 10.3% from a year earlier, down from November’s 12.9%, while the consumer price index increased 1.5%, compared with 2.3% in November. Both came in lower than economists’ expected.

The inflation surprise adds further impetus to calls for the central bank’s first cut in its key policy interest rate since April 2020, possibly as early as next week. Due to the threat of repeated viruses and a slump in property markets, authorities have taken a pro-growth stance this year.

Learn More: Goldman Lowers China 2020 Growth Forecast to 4.3% – Omicron

“The probability of a rate cut in the first quarter is high, and the closest window is this month,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd. Consumer inflation “will not be a concern in 2022” and the core measure, which strips out volatile food and energy costs, will stay muted below 1.5%, he said. 

Already, the central banking has released long-term cheap financing to banks. In an effort for fiscal growth, however, government debt sales were accelerated.

Continue reading: China moves towards a rate cut just as the world tightens

There are signs that the government has taken a variety of steps to reduce sharply increasing energy and raw material prices. However, the emergence of omicron-variant virus cases is likely to be a defining factor in coming weeks, given that China is the world’s biggest producer and consumer of raw materials. A supply disruption could occur if the epidemic continues to spread. 

Bloomberg Economics Says…

The takeaway from the December retreat in China’s factory-gate and consumer price inflation: the central bank can rest easy if — as we expect — it adds more stimulus to support the economy. For the second consecutive month, producer inflation fell while consumer inflation dropped below 2%. 

Eric Zhu, China economist

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Because of virus control measures, which impeded consumer consumption and had a negative impact on the demand, inflation in consumers remained low. Core CPI was unchanged at 1.2% from November.

“The favorable inflation trend provides the time window for monetary easing. We expect the People’s Bank of China to cut the medium-term lending facility rate in the coming months,” said Zhaopeng Xing, an economist at Australia & New Zealand Banking Group (OTC:) Ltd.

China’s tech-heavy ChiNext Index rose as much as 2.2% after the inflation data was released, it’s steepest gain since Nov. 22. Since the beginning of 2018, it had been declining every day.

December saw food prices drop by 37% for pork and 21% for vegetable, respectively. Prices could rise temporarily again due to the spreading of the more transmissible variant of omicron. However, strict mobility restrictions should be widened. A surge in demand and higher prices will occur due to the Lunar New Year Holidays. 

Learn More: Global Supply Chains Expect to Be Impacted by Omicron Reaching China

The factory gate price rose 8.1% in the past year and consumer prices rose 0.9%. The median Bloomberg survey estimates that economists predict consumer prices will grow by 2.2% in 2022 while factory-gate prices will gain 4% in the following year. 

Updates including comments and additional information from economists

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