• Annual Chinese inflation rose by 2.5% in September, the fastest rate of growth in seven months.
• At the same time, producer price inflation (PPI) declined, which Commsec’s Ryan Felsman attributed to the external challenges facing China’s economy.
• Felsman added that markets are watching for further stimulus measures by Chinese policy makers to support the economy.

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Chinese inflation rose by 2.5% for the year to September, the fastest rate of annual growth in seven months.

The result was in line with forecasts, and up from August’s 2.3% annual growth rate.

Data from the National Bureau of Statistics also showed producer prices climbed by 3.6% annually (3.5% forecast), down from 4.1% in August.

While there are usually very few surprises in official Chinese data, CBA senior economist Ryan Felsman said today’s figures illustrate the challenges facing the country’s economy.

He said that while Chinese consumer prices have now risen for four straight months, the annual rate of growth is still below the government’s target of 3%.

At the same time, producer price inflation slowed for the fourth straight month – a trend Felsman said was “not ideal”.

The combination of higher consumer prices and lower factory costs can adversely affect company profits, he said.

In addition, raw materials costs rose by 7.3% in annual terms, driven up by rising oil prices and the effect of the US-China trade war.

Within the headline data, the monthly gain was driven by food prices which rose by 2.4% in September, leaving the annual increase at 3.6%.

“Pork prices continued to surge in September (up 3.7%) as concerns over the spread of African swine fever escalated,” Felsman said.

“Bad weather, including typhoons, flooding and hailstorms buffeted the countryside, pushing up overall annual food prices to seven-month highs.”

The results are reflecting on the ongoing shift in China’s economy as it re-balances towards consumption-based growth.

“While consumer prices remain contained for now, rising food prices, together with increasing rental and fuel costs, could weigh on broader household consumption,” Felsman said.

China is also dealing with multiple external challenges as it faces the prospect of further US tariffs.

Factory activity is slowing, and non-government Caixin data showed that in September new export orders contracted at the fastest pace since February 2016

Last week, Chinese stocks tumbled to multi-year lows, and markets are on the lookout for additional government support measures.

“People’s Bank of China Governor Yi Gang recently reiterated that interest rates could be adjusted and banks’ reserve requirement ratio lowered further, due to significant downside risks from the Sino-US trade dispute,” Felsman said.

“A more pro-active fiscal policy focused on tax cuts, bond issuance for infrastructure spending and social housing investment could provide further support for the Chinese economy.”

While Chinese inflation data has no immediate bearing on the outlook for Australia’s economy, the results “will continue to be closely monitored by Reserve Bank policymakers and economists”, Felsman said.

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