China CPI, Inflation hits multi year high

China’s CPI inflation hits 2.5% yoy in January, against the Bloomberg consensus of 2.4% yoy and it’s prior of 2.1% yoy. The PPI accelerated further to 6.9% yoy, higher than the Bloomberg consensus of 6.5% yoy. The CPI hit the highest since June 2014 while the PPI hit the highest since August 2011 (Figure 1). Part of the CPI acceleration was driven by base effect due to the earlier arrival of the Spring festival, so headline CPI may moderate again in the coming month. However, against the background of the PBoC taking pre-emptive steps towards financial risk and controlling asset price bubble, the fact that both CPI and PPI hit multi-year high should reinforce on-going monetary tightening. ?

Food and Beverage contributed 0.10 percentage points to acceleration in headline inflation, non-food items contributed 0.30 pp of the acceleration. Pork price increased most amongst the food basket, by 7.1% yoy. Transportation fuel prices increased most among the non-food basket, by 16.5% yoy.

Core inflation (CPI excluding food and energy) increased to 2.2% yoy, the highest since October 2011. The moving seasonal base also contributed to this month’s high reading, but its increasing trend has clearly carried on.

PPI for mining products increased most among the PPI basket, by 31% yoy (vs. prior of 21.1% yoy). This contributes 5.7pp, i.e. 83% of headline PPI inflation. We expect the headline PPI to hit close to 7.5% yoy in the coming month (Figure 5). Lead indicator points to continued sequential increases of PPI, and the statistical base was set very low.

 We maintain our view that the 2017 full year CPI is likely to increase to 2.2% yoy compared to 2.0% in 2016. Based on current information, the PPI is likely to stay above 5.5% yoy for most of 1H17. Assuming no large swing in commodities prices, the higher base should yield a gradual decline towards 4.0% yoy in 2H17.