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China’s inflation eased in May. The country’s headline inflation slowed to two percent y/y from 2.3 percent y/y in April, according to China’s National Bureau of Statistics.
However, it continues to be stronger than the average pace of 1.4 percent y/y seen in 2015. Tobacco, food and liquor prices slowed to 4.7 percent. They contributed 1.39 percentage points to the headline CPI, as compared with the 1.74 percentage points contributed in April.
On a month-on-month basis, China’s CPI inflation decelerated to 0.5 percent. Substantial decline in vegetable prices of 21.5 percent m/m mainly drove the food prices lower, weighing on the CPI by 0.64 percentage points. The lower food inflation is likely to be a temporary factor, said ANZ in a research report.
However, risks to the outlook of inflation are expected to be skewed on the upside due to weather risks. There was a continuous upward trend seen in pork prices that rose 33.6 percent on a year-on-year basis last month.
This countered the deceleration of vegetable price rise. According to the price data, the whole sale pork price appears to have continued rising in early June as well, increasing about 35 percent y/y in the week of June 3. In the meantime, vegetable prices might be supported by the unpredictable weather conditions in summer, according to ANZ. There are upside risks to inflation.
Meanwhile, the producer price’s disinflationary pressure levels alleviated in May. The producer price index fall contracted to 2.8 percent y/y in May, as compared with April’s fall of 3.4 percent.
On a month-on-month basis, the PPI was up 0.5 percent m/m in May, the third straight sequential rise in PPI. This shows the rising commodity prices and likely rebound in domestic demand. If this trend carries on, the PPI is likely to turn positive in the fourth quarter of 2016, according to ANZ. If this happens, China will be posting a producer price inflation for the first time since February 2012.
The People’s Bank of China is unlikely to push for aggressive monetary policy easing as the risk of deflation eases considerably. Moreover, the PMI for May implies stability in the momentum of growth and domestic manufacturing activities. The central bank is expected to cut the reserve requirement ratio for just one more time this year.
“The PBoC will maintain sufficient liquidity in the money market and keep the 7-day repo rate at around 2.25 percent in the near term,” added ANZ.
