China’s February CPI inflation accelerates on higher food inflation, likely to remain strong in March

China's CPI inflation accelerated more than expectations at 2.3% y/y in February, mainly due to higher food price inflation. The official release stated that increase in fresh vegetable prices alone added 0.84ppt to February's headline inflation, as compared with the expected 1.5ppt contribution to the headline figure. Meanwhile, non-food price inflation decelerated further by 1% in February from 1.2% in January, whereas core inflation declined from 1.5% to 1.3%.

Food prices surged due to unusually cold weather. Since mid-February, prices of most food items eased, but the high levels indicate that year-on-year CPI headline inflation might continue to be strong in March. Even though inflation in food price might have affected expectations, the effect is not expected to last. Hence, the central bank is expected to be at some distance from the government's inflation target of 3%. Meanwhile, producer price index continued to be in deflation.

Even if headline CPI inflation has been more than anticipated in 2016, and might continue to be relatively strong until food prices normalise, this is unlikely to pose a constraint on monetary policy. The PBoC is expected to continue with an accommodative monetary policy to help growth against the backdrop of weak economic activities. The recent government work and budget report for 2016 NPC session has promised more expansionary fiscal and monetary policies to help growth. The central bank is expected to further ease in the coming months.