OREANDA-NEWS. October 28, 2014. China’s core inflation (CPI) and producer price inflation  (PPI) declined in September, with CPI inflation slowing to a 1.6% and PPI down 1.8%, the government said.

The immediate cause of the drop in inflation in September is the exact same thing that sent inflation plummeting in the U.K. last month: global oil prices are in decline, having fallen sharply in September.

Amid falling inflation and generally softer domestic growth, the People’s Bank of China lowered the 14-day repo interest rate another 10 basis points on Tuesday, consistent with the markets view that Chinese interest rates have room to fall. The lower financing costs remains a top policy priority. Barclays Capital economist Jian Chang wrote in a note to clients today that she expects an additional 25 basis points rate cuts from the central bank sometime before the year is up.

The weaker-than-expected inflation data comes amid signs of stabilization in economic activity, following this week’s high import numbers. However, real sector data next week are likely to remain on the softer side, says Chang. The focus for China-watchers now shifts to monetary data, where Chang estimates new loans to come in at 720 billion yuan, marginally below the consensus forecast of 750 billion. Chang also forecast modest 7.5% yearly growth in industrial production and a 16.3% yearly increase fixed asset investments. This number continues to decline as China invests a bit less in big development projects.

Meanwhile, the yuan’s floating peg to the U.S. dollar has caused the yuan, like the dollar, to surge against most non-U.S. trading partner currencies last month. The dollar peg is also the ultimate cause of the sharp drop in Chinese fuel prices that showed up in both the CPI and PPI reports for the month, says Bill Adams, senior economist for PNC Financial Services in Pittsburgh.

“Put more concisely, the yuan got stronger last month, imports got cheaper, and inflation slowed,” he says.

Global oil supplies are certainly helping China.

North American oil production is booming, and OPEC member states said they are not cutting production despite ample supplies.

A closer read of China’s industrial producer prices also shows inflation levels are also falling for non-energy goods and services, a sign that deflation remains a problem for the world’s second largest economy.

“Cheaper fuel is excellent short run news for Chinese consumers, since, just as in other consumer economies, it means less disposable income goes into gas tanks, and more is left over for spending on other goods and services,” Adams says.

Worth noting, the Chinese government said this week that it will raise taxes on oil and gas by Dec. 1.