Chinese PPI increases for the third straight month, signals end of deflation pressure in the industry

Data released earlier on Thursday showed that Chinese inflation saw a further increase in producer prices in May. PPI increased 0.5 percent m/m in May, the third monthly increase, driving the annual rate up to -2.8 percent (consensus -3.2 percent y/y) from -3.4 percent y/y in April.

Chinese producer prices are driven mainly by commodity prices and the increase in PPI is a mere reflection of higher metal prices at the beginning of 2016. The rise in producer inflation is positive for industrial profits which are now estimated to have remained positive in May.

“The main takeaway is that deflation pressure in the industry has changed rapidly due to higher commodity prices. We expect producer price deflation to be over for now and see moderate inflation at the producer level. It has little implication for monetary policy, which is currently guided mainly by economic activity,” said Danske Bank in a report.

CPI inflation also released on Thursday surprised on the downside in May, moving down to 2.0 percent y/y, from 2.3 percent y/y in April. This is driven by lower food prices, as inflation in vegetable prices has moved lower. Inflation excluding food was unchanged at 1.1 percent.