Vai Capital Economics:
• Higher food and oil prices pushed up headline inflation last month but broader price pressures remained subdued and we don’t anticipate an imminent turnaround in underlying inflation.
• Consumer prices rose 2.3% y/y in March, up from 1.5% y/y in February (the Bloomberg median was 2.3%, our forecast was 2.1%). (See Chart 1.) Food price inflation accelerated to 4.1% y/y, more than reversing February’s seasonal decline from 1.9% to 0.7%, which was caused by a shift in the timing of Chinese New Year. The main culprit for the pick-up was pork price inflation, which jumped last month from -4.8% to 5.1% on the back of supply disruptions caused by African swine flu (ASF). (See Chart 2.)
• Non-food inflation edged up from 1.7% to 1.8%, driven by the rise in oil prices. Core inflation, a better guide to underlying inflation that strips out both food and energy prices, remained stable at 1.8%.
• Producer price inflation picked up, to 0.4% y/y, up from a two-year low of 0.1% in February (Bloomberg 0.4%, CE 0.3%). In m/m terms, factory gate prices rose for the first time in five months. (See Chart 3.) However, this was almost entirely driven by a rise in the cost of raw materials, particularly oil. The price of manufactured industrial inputs and consumer goods held broadly steady. (See Chart 4.)
• Looking ahead, we expect oil prices to fall back in the coming months. This will drag down PPI, though we expect the impact on CPI to be offset by a further rise in pork prices. Meanwhile, we still expect some easing of broader price pressures in the near-term given our view think that economic growth will weaken further in the coming months before bottoming out later this year.