China’s PPI accelerated to 5.5% in December, against its previous reading of 3.3% and Bloomberg consensus of 4.5%. CPI inflation moderated to 2.1% from 2.3% previously.
The improved PPI is supportive of corporates’ cash flow and profitability. The PBoC may be able to pay more attention to financial risk management issues. Room for the PBoC to guide up the level and volatility of interbank rates is getting larger.
Current CPI inflation is still below the government’s upper bound. This offers room to keep overall credit and monetary growth at a steady rate for the time being.
In our previous note, we expected the PPI to overtake 5%. Based on the latest information, we believe the PPI is likely to increase further towards 6.5% in the coming months. The key risk to China’s inflation dynamic is an increase of consumer inflation expectations. This also offers motivation for the PBoC to introduce tightening elements for its policy setting.