【Economic Perspectives】China Inflation in Feb – PPI rebound may continue into 2Q

According to the NBS, China’s CPI in Feb narrowed YoY decline to 0.2% whereas MoM growth decelerated due to weaker pork prices. PPI enlarged YoY growth to 1.7% in Feb thanks to continued economic recovery in both domestic and global markets pushing up oil and other commodity prices, though MoM increase decelerated.

 

  • CPI MoM growth decelerated to 0.6%, which was in contrast to previous years’ accelerating pattern during the CNY holiday. Food price growth slowed down. As supply gradually ramps up, pork price declined 14.9% YoY and 3.1% MoM, enlarging negative contribution to 0.39ppt to YoY CPI growth. Other food items, such as vegetables, fruit, seafood, recorded MoM increase during the CNY.

 

  • Non-food prices strengthened. The oil price rally, bolstered by global demand surge, lifted transportation and commutation prices. Urban residents staying put for the Spring Festival helped boost prices of cultural and recreation, e.g. those of movie and show tickets, and prices of residential services. Core CPI, excluding food and energy prices, recorded flat YoY growth in Feb, vs. -0.3% in Jan.

 

  • PPI rebound driven by recovery and demand boost. PPI increased 1.7% YoY and 0.8% MoM, driven primarily by 1) booming industrial demand in Feb, 2) stepped-up investment in infrastructure, electricity supply, real estate, etc. and 3) global rally in oil prices as economic outlook turned brighter. Booming demand for NEVs and household appliances (driven by overseas demand) has also contributed to price increase of non-ferrous metals.

 

  • PPI inflationary pressure may last in 2Q21 and calm in 2H21. While CPI growth is likely to stay moderate as a combined result of smoothing pork prices but stronger service prices, we forecast PPI growth will accelerate further considering low base last year and continued post-pandemic recovery in 2Q21. In 2H21, however, PPI expansion is likely to slow down because 1) economic rebound may decelerate marginally, and 2) commodity supply, part of which interrupted by COVID-19, will gradually increase to catch up with demand. Therefore, commodity prices are likely to stabilize in 2H21. We revise up PPI forecast in 2021 to 3.5% to reflect surprises in oil and commodity prices. 

 

  • Implications on monetary policy. While inflationary pressures always spook concerns of tightening, China’s monetary policy has already pledged to be more targeted and precise, by not pushing up reflation via mass liquidity injections. Headline PPI figures may overshoot in 2Q but part of the increase is due to last year’s low base or transitory supply-demand mismatch. That said, we don’t think the PBoC will execute further tightening to combat inflation.
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