In news that the global economy did not need, inflation in China shows no sign of coming under control, even as the People’s Bank of China has slowed its pace of tightening in the past 1 or 2 months. The headline consumer price index (CPI) rose 6.5% on an year-on-year basis vs. 6.4% in June, and also above the consensus of 6.4%. On a month-on-month basis, the headline CPI rose 0.5%.
Looking at prices in different categories, food prices are still the driver here, up 14.8% yoy, and within which meat prices rose 33.6% yoy. Non-food prices, however, are rather more stable, rising 2.9% yoy only. On a month-on-month basis, food prices rose 1.2%, which is still pretty much out of control, while non-food prices are 0.1% higher. In particular, prices for meat products rose 4.7% on a month-on-month basis, suggesting that the efforts the Chinese government has put in to curb prices has not yet worked.
On another note, the headline producer price index PPI rose 7.5% yoy vs. 7.1% yoy in June.
This inflation report is even less reassuring than last month’s report. Last month we saw food prices rose 0.9% on a month-on-month basis, and now we have 1.2% increase on a month-on-month basis. If inflation fighting remains a top priority for the Chinese government, there is no reason why they can stop tightening monetary policy. Yet they have pretty much paused, reflecting their fears of a hard-landing.
The global macro risks right now will only make Chinese policy makers even more worried about slowing growth too much. Amid the mess we are seeing right now in the developed economies, I suspect the probability that Chinese policy makers will tighten further is probably declining, even though it remains necessary.
This is a dilemma no central bankers would like to face…