China: Mild CPI inflation, significant softening in PPI inflation – Nomura

Analysts at Nomura note that China’s producer price index (PPI) inflation softened to 4.3% y-o-y in January from 4.9% in December, in line with market consensus but weaker than their forecast (Consensus: 4.3%; Nomura: 4.6%).

Key Quotes

“In month-on-month terms, PPI inflation declined to 0.3% in January from 0.8% in December.”

“The moderation in PPI inflation was caused by upstream sectors. PPI inflation in the mining sector fell by 2.3 percentage points (pp) to 6.8% y-o-y in January, while that of raw materials and processing & assembly sectors softened mildly, by 0.8pp and 0.6pp, respectively. By industry, PPI inflation fell noticeably in petroleum & natural gas extraction, non-ferrous metal processing, petroleum processing and chemical material & product industries, combining to subtract 0.4pp from the year-on-year headline number. Despite the base effect, the decline in PPI sends a different signal on economic growth momentum than the strong trade data released yesterday. Economic growth may not be as strong as import growth suggested. Considering the continuing efforts on financial deleveraging and property market regulations, we still believe domestic demand growth will be weighed on by a cooling property market and tighter financial conditions.”

“Consumer price index (CPI) inflation declined to 1.5% y-o-y in January from 1.8% in December, consistent with market expectations (Consensus: 1.5%; Nomura: 1.4%). The decline in CPI year-on-year change is mainly due to the high base last year caused by calendar effects (The lunar new year holidays fell in late January last year but come in mid-February this year). Food price inflation edged down 0.1pp to -0.5% y-o-y in January, while non-food price inflation moderated to 2.0% y-o-y, from 2.4% in December. On a month-on-month basis, CPI inflation picked up to 0.6% from 0.3% in December, driven by higher food prices, due to the seasonal factor of the lunar new year and colderthan-usual temperatures in January.”

“Looking ahead, there could be a temporary rebound in PPI inflation in Q2 due to the low base last year, but we maintain our call for a downtrend in PPI inflation in 2018 on weakening investment demand due to the cooling property market, rising financing costs, and a weakening of the outlook for exports. We expect CPI inflation to climb mildly in the quarters ahead, likely driven by higher food and services prices, and the pass-through of high producer and property prices. In our view, policymakers will keep macroprudential policies tight, while the People’s Bank of China is likely to keep monetary policy.”