【Economic Perspectives】China inflation in Aug – Ex-food inflation monitors trended well

The NBS released China’s Aug inflation monitors today, which was largely in line with market and our estimates. CPI YoY growth trended down modestly to 2.4% in Aug as growth momentum of food prices decelerated. Non-food prices documented the first MoM increase since Feb. Meanwhile, PPI YoY growth continued to narrow to 2.0% along with gradual recovery of global economy. Excluding food items, inflation monitors were trending favorably, underpinned by stabilizing core CPI and improving PPI. Looking forward, we believe PPI could continue to narrow its decline whereas service prices are likely to firm up, driven by holiday demand.

  

  • Food price growth decelerated, up 0.4% MoM and 2.4% YoY, vs. 0.6%/2.7% in Jul. Due to prolonged rainy weather, prices of most food items, such as vegetables (+6.4% MoM) and meat (+1.4% MoM) kept climbing up, but at a slower pace than in Jul. Pork prices rose 1.2% MoM and 52.6% YoY in Aug, decelerating significantly from 10.3% MoM/85.7% YoY in Jul. With the normalization of hog breeding industry and last year’s high base, we believe pork’s disturbance on CPI growth will abate in 3Q and 4Q. 

 

  • Prices of non-food items firmed up, which increased 0.1% MoM / 0.1% YoY in Aug, representing the first positive MoM growth since Feb. Prices of transportation & communications rose 0.3% MoM, the third consecutive month of increase, and narrowed its YoY decline to 3.9%. This was likely a result of 1) sequential resumption of business and leisure travel; 2) modest increase of oil prices; and 3) stronger travel demand during the summer holiday, which is likely to extend into the Oct 1 National Holiday. Prices of recreation and cultural activities may also strengthen with the approach of mid-autumn festival and Oct 1 Holiday. That said, we think non-food prices are likely to continue trending up in Sep.

 

  • PPI increased 0.3% MoM in Aug, marking the third consecutive monthly improvement. Recovery of industrial activities, in both domestic and international markets, has started to strengthen commodity prices gradually. PPI growth of oil-related industries decelerated MoM as oil price rebounded modestly in Aug. On YoY basis, PPI decline of major industries continued to narrow, including oil and natural gas extraction, oil, coal and fuel processing and ferrous metal processing. PPI growth of non-ferrous metal processing enlarged to 3.4% YoY.

 

  • Future trend forecast. 1) CPI YoY growth may edge down gradually in 3Q and 4Q as pork contribution wanes. Non-food service prices are likely to go up in the upcoming months driven by holiday demand. 2) Global and domestic economic recovery has been on track to lend support to PPI growth.
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