China’s Inflation Rises to Seven-Year High on Soaring Pork

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China’s consumer inflation rose to a seven-year high last month on the back of rising pork prices, complicating policy makers’ decision on whether to further ease funding for the country’s weakening industrial sector.

• The consumer price index rose 3.8% in October from a year earlier, up from 3% in the previous month.
• Factory prices fell by 1.6%, compared with the median estimate for a drop of 1.5%.

Key Insights

• While monetary policy isn’t the solution for rising pork prices caused by a supply shock, the People’s Bank of China has stayed relatively restrained compared with other major central banks even as growth has slowed. The bank offered a mini cut to the interest rate of 1-year bank funding this week amid a bond sell-off, while keeping the overall liquidity supply neutral.
• “The surging CPI inflation is due to supply (mostly pork price) and the worsening PPI deflation is due to demand,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “Ideally monetary policy should respond to demand instead of supply. In reality, the PBOC is likely to strike a balance between PPI and pork price.”
• While further monetary stimulus would help companies struggling with weakening demand, deflation and higher tariffs, even faster inflation would hurt households more.
• “Persistent deflation in the industrial sector squeezes profitability -- reducing leeway for investment and hiring,” David Qu, economist at Bloomberg Economics in Hong Kong, wrote in a note.

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• CPI rose to the highest since January 2012, according to data compiled by Bloomberg.
• Pork prices were up 101.3%, the National Bureau of Statistics figures showed.
• Food prices jumped 15.5%; food, tobacco and alcohol combined rose 11.4%, accounting for 3.37 percentage points of the CPI.
• Some economists have said consumer inflation could rise to 4% soon on the back of surging pork prices

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