China’s CPI, PPI inflation accelerate stronger than expectations in January, PPI likely to weaken in H2

China’s headline consumer price inflation accelerated in January, coming in stronger than market expectations because of the Lunar New Year and base effects. The headline inflation rose to a three-year high of 2.5 percent year-on-year in January, as compared with December’s 2.1 percent and consensus expectation of 2.4 percent.

On a month-on-month basis, the headline inflation rose 1 percent as compared with the 0.2 percent rise in December, owing to increases in transportation, food and tourism sectors in the midst of the holiday season. These contributed over 60 percent of the overall 1 percent sequential rise in January.

In the meantime, producer price inflation continued with its uptrend, rising sharply to 6.9 percent year-on-year in January from December’s 5.5 percent owing to the low base in 2016 and increased global oil prices. Consensus projection was for 6.5 percent. But on a sequential basis, the producer price inflation growth moderated in January. This implies that the inflation momentum might not be as solid at the first glance.

PPI inflation slowed to 1.2 percent sequentially in January following a 1.6 percent rise seen in December. The rise in prices of producer goods decelerated to 1.1 percent sequentially from 2 percent prior, mostly because of smaller price rises in the ferrous metals, coal sectors and chemicals. However, prices are still at elevated levels.

In the meantime, consumer goods prices rose just 0.2 percent; lower than 0.3 percent in the prior month. This affirms the view that the inflationary pressure is still focused in the raw material and upstream sectors has not spilled over to downstream industries.

The People’s Bank of China seems to have gradually shifted to a tightening bias, according to an ANZ research report. However, no aggressive tightening is expected as inflation is still under control. The pace of hikes in some of the central bank’s lending facilities and open market operations at the end of January and early February are to pre-empt potential risks from quick expansion of credit and act as a signal that policy makers are mindful of financial risks in specific sectors. Policy rates are likely to shift higher in 2017. But, the Chinese economy is not strong enough to offset any broad tightening and policy makers should be careful in directing market expectations, said ANZ.

“We continue to expect the PPI to soften in H2 after surging in H1, posting downside risks to the current PPI-driven recovery”, added ANZ.

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