China’s consumer price inflation likely to accelerate to 2 pct this year, says Barclays

In October, China’s inflation gauged by the consumer price index continued with its uptrend. It accelerated to 2.1 percent year-on-year from 1.9 percent, partly driven by a low base. Core inflation was trended upwards, accelerated from 1.7 percent in September to 1.8 percent in October. In the meantime, China’s PPI inflation accelerated sharply to 1.2 percent in October from 0.1 percent in September. This was the biggest rise since February 2010.

The sharp acceleration in the PPI inflation shows strong commodity prices, as compared to a stabilizing demand and the attempts of government to lower overcapacity, said Barclays in a research note. The solid recovery in commodity prices and the PPI inflation in China, along with continued rise in core inflation indicate towards upward pressure on headline inflation. According to Barclays, China’s inflation is expected to reach 2 percent in 2016 and 2.2 percent in next year.

Furthermore, the People’s Bank of China is expected to keep the benchmark rate unchanged for the remainder of 2016. The central bank is unlikely to change the RRR levels as well in 2016.

On the trade front, contraction in imports and exports narrowed in October. Even if the strength of external demand continues to be uncertain, domestic demand is expected to improve. China is expected to releases a series of real activity data next week. The nation’s industrial production growth is likely to have risen slightly, given the rebound in the electricity output. FAI growth is expected to have held up as solid investment in infrastructures is expected to have been countered by moderation of real estate investment. Meanwhile, retail sales are likely to have retreated due to deceleration of auto sales, added Barclays.