China’s producer prices accelerates above expectations in December, consumer inflation slows down

China’s producer price index came in above consensus expectations in December. The PPI inflation accelerated 5.5 percent year-on-year, as compared with market projections of 4.6 percent. The strong print is mainly due to a rebound in price of coal, non-ferrous metals and coal, whose producer prices rose 34 percent, 17.1 percent and 35 percent respectively on a year-on-year basis.

Given that inflation is returning to China, the nation’s producer price index should stay robust in the first quarter of 2017. The PPI inflation is expected to be underpinned by a low price base and the government’s enforcement of capacity reduction. But the index is likely to weaken in the second half of the year as the base effects come in. The annual PPI is expected to rise by 2.5 percent in 2017, said ANZ in a research report.

The robust PPI is not expected to pass through to downstream sectors in 2017. Sluggish sub-PPI of consumer goods shows that the inflation impact transmitted downstream should be restricted, stated ANZ. The profitability of mid- and downstream producers would be squeezed if increasing material prices cannot be transferred to their consumers.

But the high commodity prices would delay the attempts of the government to fight over-capacity. Producers are tempted to bring in their engines again in the face of increasing prices. The government would not entirely welcome the quick rebound of the PPI.

The figure released today implies that the People’s Bank of China’s policy would concentrate on bubble prevention and corporate de-leveraging. However, with decelerating growth and uncertainties in the economy, such as fixed asset investment and exports, the PBoC is unlikely to being tightening policy in the first half of 2017. The central bank is expected to continue to keep adequate liquidity levels to avert a cash crunch. But high inflation rates would push market interest rates higher.

“We believe the PBoC will likely increase the size of reverse repos and medium term lending facilities (MLF) before the Spring Festival period in late January”, added ANZ.

Meanwhile, China’s consumer price index inflation slowed slightly in December to 2.1 percent from November’s 2.3 percent on a year-on-year basis. Consensus projection was for CPI inflation to rise 2.2 percent. On a sequential basis, CPI rose 0.2 percent in December, as compared with 0.1 percent recorded in the prior month. Food inflation, on a year-on-year basis rose 2.4 percent, slowing from the previous month’s 4 percent rise. On the other hand non-food inflation accelerated 2 percent year-on-year, as compared with November’s 1.8 percent.