China - Easing inflation paves way for further piecemeal support

Producer price inflation eased further in January

China’s inflation figures for January, published earlier today, point to a further easing of inflationary pressures. After reaching a 26-year high of 13.5% yoy in October driven by commodity-related sectors, producer price inflation (PPI) continued its slide, and reached a three-month low of 9.1% yoy in January (December: 10.3%, consensus: 9.5%). This lends support to our view that PPI inflation has more or less peaked and will come down in the course of this year, although additional disturbances from the pandemic and/or renewed spikes in commodity prices could lead to hiccups in this process. 

Headline inflation drops below 1% yoy, but will bounce back

Meanwhile, CPI inflation behaves completely different in China compared to other key economies such as the US or the eurozone, where the commodity boom and/or supply-demand imbalances have caused headline inflation to surge. By contrast, China’s CPI inflation fell to a four-month low of 0.9% yoy in January (December: 1.5%, consensus: 1.0%). This partly reflects the fact that Chinese domestic demand is still relatively subdued and lags the recovery from the pandemic shock (unlike the situation in the US, for instance). More specifically, the further drop in headline inflation is driven by a turn in the food price cycle, with food prices falling by 3.8% yoy in January. Meanwhile, core inflation also remains at low levels (stable at 1.2% yoy over the past here months). We expect headline inflation to bounce back in the course of this year, but to remain well below the PBoC’s target of 3%.

All in all, in our view the fading of inflationary pressures at the start of this year paves the way for further piecemeal monetary and fiscal support, as well as a relaxation of macroprudential regulation (including in real estate), to support growth.