China inflation unlikely to pick up significantly following timid pickup in consumer demand

Consumer prices in China are expected to not pick up significantly in the near term, weighed down by little improvement in consumer demand. The sequential growth also indicates that underlying inflation pressure remains benign.

First, while recent China activity indicators came in stronger than expected, this actually points to stabilizing growth rather than a solid recovery. While the market prefers to watch the headline year-on-year growth figures, the sequential growth (seasonally adjusted month-on-month growth) provides a better gauge of underlying momentum, Commerzbank reported.

The sequential growth of industrial production, retail sales and fixed asset investment suggests that only retail sales have been holding up in the past three years, both industrial production and fixed asset investment illustrate a moderation in growth.

The acceleration in China’s PPI is largely driven by coal and steel prices, which to a large extent reflects a massive speculation in the futures markets. Drilling into the PPI figures, prices in coal mining and ferrous metals rose 25 percent and 10 percent since August, while other sectors only saw generally stable prices.

"While we believe that China’s inflation could pick up modestly in the coming year due to the improving global economic outlook and rising oil prices, we do not think that China will have an inflation problem any time soon," the report said.