China recorded headline CPI inflation of 2.3% y/y in April, on par with market expectations and unchanged from March. On month-on-month basis, CPI inflation decelerated 0.2% as compared with a decline of 0.4% in March. Food prices were up 7.4% y/y and dropped 1.4% m/m in April, whereas non-food prices climbed 1.1% y/y. China’s core inflation was also unchanged from March at 1.5% y/y, whereas on month-on-month basis it was 0.2%. Meanwhile, China’s producer prices shrank 3.4% y/y, and rebounded by 0.7% m/m in April.

The producer prices have started rebounding after contracting for over two years. The April reading suggests a growth rate of 0.7% m/m, noted HSBC. It seems apparent that the recovery in commodity prices has assisted in prices to rise in energy and steel related sectors.

If the prices of commodity continue to stay at the current levels, the lower base from the second half of 2015 suggests that PPI readings might further rebound in the following months, according to HSBC. However, given the lack of stabilization in domestic demand, it is difficult to see PPI deflation coming to an end, said HSBC. If China’s activity data slows down, global commodity prices might weaken.

Meanwhile, the volatile food component has begun moderating already, even though the April CPI inflation data is seen to be unchanged from March. Food price inflation slowed in April from March. Prices of different types of vegetables already reached their peak in February and are decelerating rapidly on month-on-month basis. Pork prices, which are quite high currently are likely to slowdown materially in the second half of 2016, noted HSBC. Hence the upward pressure on CPI inflation will diminish in the following months.

“Full year CPI will likely end comfortably below the 3% official target for this year”, added HSBC.