Chinese inflation remains weak

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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.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.