China Consumer Inflation Surge Seen as Unlikely to Shift PBOC

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China’s consumer prices surged on the back of temporary food supply factors, while factory inflation provided further evidence of a nascent economic recovery.

Consumer inflation accelerated to 2.3 percent in March from a year earlier, up from 1.5 percent in February and posting the biggest jump in more than a year. The surge was mostly led by rising vegetable and pork prices, which drove the CPI up by more than half a percentage point, according to the National Bureau of Statistics.

China Consumer Inflation Surge Seen as Unlikely to Shift PBOC

Core consumer prices, excluding food and energy, stayed flat at 1.8 percent, and factory inflation halted a dis-inflationary slide, gaining 0.4 percent.

Because the inflation rebound was driven by food-price increases that may prove temporary, the central bank is unlikely to abandon its policy of keeping cheap money flowing to the private sector for now. Lingering deflation risks and uncertainties over the trade war and the sustainability of the economic upswing also argue for caution.

“Monetary policy won’t make adjustments, and overall inflation won’t be a big issue for this year" because core inflation remains steady and factory-gate prices will stay at a low level going forward, said Ding Shuang, chief China and North Asia economist at Standard Chartered Bank Ltd. in Hong Kong. The People’s Bank of China is likely in an “observation window” at the moment.

Pork prices, a key element in the country’s CPI basket, rose 5.1 percent in March, the first increase after 25 months of decline. That alone drove the CPI to rise 0.12 percentage point, the NBS said in a statement. Over a million hogs were culled in an outbreak of African swine fever and pig feed output has dropped.

Rebounding factory prices signal a further firming in the nascent economic recovery, which if sustained give firms greater pricing power, aid profits and the help them repay their debts.

“The PBOC still have good reasons to cut reserve-requirement ratios again because there’ll be tax collection and maturing medium-term lending soon,” Ding from the Standard Chartered Bank Ltd said.

“Even if there’ll be policy shifts, it probably won’t come from monetary policy as it’s never been very loose”, he said, adding the pace of fiscal expenditure can slow down to save some bullets, if the economy does turn around.

The outlook for producer-price inflation is still modest. The PPI index will likely grow by just 0.3 percent in 2019, according to the median estimate of 15 economists in a Bloomberg survey, down from a forecast of 0.8 percent in February.

What Bloomberg’s Economists Say...

“With the economy broadly slowing and the banking system in need of liquidity, we think it necessary for the People’s Bank of China to sustain support -- and the current inflationary environment still allows room for it to do so.”
-- David Qu and Qian Wan, Bloomberg Economics in Hong Kong
-- For the full note click here

Economists are looking ahead to first-quarter output data due next week for hard evidence that the worst of a cyclical slowdown is over as multiple targeted stimulus measures kick in. Signs that China’s economy is stabilizing have spurred a debate about whether the central bank should keep injecting liquidity into financial markets, with a former senior official warning of the risk of asset bubbles.

Economists and traders expect the PBOC to cut reserve requirements at least three more times this year, having used such cuts since early 2018 to manage market liquidity and funnel cash into the slowing economy. It will likely take more than a higher food prices to shift the central bank, according to Lu Ting, chief China economist at Nomura Holdings Inc.

“The acceleration in CPI inflation mainly comes from pork prices rather than a general rise in prices,” he said. “Unless inflationary pressures spread over to other areas, the central bank will more likely look through the cyclical acceleration in pork prices and continue to support the economic growth via an easing monetary policy bias throughout the rest of this year.”

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