John Loundsbery writes:  The March inflation numbers continue in the same pattern that has continued for over three years now:  CPI (Consumer Price Index) inflation is low but hanging on to a positive level, +1.4% year-over-year and essentially the same as the six-month average 1.35%.  The report was slightly higher than the consensus expectation of 1.3% reported by Reuters.  The PPI (Producer Price Index) which has been in deflation for more than three years, also continues in a downtrend with a March reading of – 4.6%, slightly more positive than the February reading of -4.8 which was also the expectation quoted by

While both CPI and PPI have been in a similarly sloped down trend for three years, PPI has been negative for the entire time and the three readings in 2015 have all been below –4%.  This bears watching because PPI may be seeing an acceleration of the rate of deflation.  If readings in this new domain below –4.0% continue for a number of months more, there may be a drag lower for CPI.

It is important to note that CPI covers goods and services while PPI is derived from the input prices for manufacturing which is dominated by goods and raw materials.  The service sector of the Chinese economy has been much stronger than manufacturing in the most recent couple of years which explains why PPI has not yet dragged CPI into deflation.  But it will be difficult for CPI to remain at current levels if PPI degrades further and becomes entrenched in the new range below –4%.