Analysts at Nomura note that the Chinese consumer price index (CPI) inflation ticked up by 0.2 percentage points (pp) to 2.3% y-o-y in August (Consensus: 2.1%; Nomura: 2.3%), while producer price index (PPI) inflation fell by a significant 0.5pp to 4.1% (Consensus: 4.0%; Nomura: 4.1%), both consistent with Nomura’s forecast.
Key Quotes
“The rise in CPI inflation was mainly driven by a shortage of vegetable and pork supply partly due to flooding in Shouguang (in Shandong Province, well known as “China’s home of vegetables”), while the continued weakening of PPI inflation signals further weakening in domestic demand.”
“CPI inflation has been muted so far this year, but has recently returned to market-watchers’ radar screen due to catastrophic floods in Shouguang, China’s “home of vegetables”; the spread of fatal African swine fever (ASF) in some provinces; sky-rocketing rents in Beijing; RMB depreciation; and escalating China-US trade tensions, which may raise import prices of some key commodities like soy beans.”
“With the ongoing growth slowdown, markets are even worried that China could become mired in a kind of stagflation with rising inflation risk significantly constraining Beijing’s policy room to ease.”
“Markets need to keep an eye on developments around ASF, in our view, but otherwise we believe inflation concerns are overdone.”
“The rise in food prices and rents due to some supply and demand shocks could be short-lived, while overall CPI inflation risk is still muted and could fall back to around 2.1% in September; we do not expect Beijing’s policy easing agenda to be affected by inflation concerns, so far.”
“Given the strong domestic and external headwinds to growth, we believe Beijing will ramp up its policy easing/stimulus measures in the coming months, although these easing measures are likely to be narrower, slower and smaller than previous easing cycles.”
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