CPI, PPI Rebound Expected to be Short-lived as Central Bank Maintains Restraint

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Leading Chinese analysts do not expect the recent rebound in CPI and PPI readings to be pronounced, with the central bank likely to maintain neutral monetary policy amidst its ongoing deleveraging campaign.

Figures released by China’s National Bureau of Statistics on 9 September indicate that the CPI for August saw a year-on-year increase of 1.8%, as well as rebound of 0.4 percentage points compared to the preceding month, significantly ahead of consensus market expectations.

PPI saw a year-on-year increase of 6.3% in August, which was also ahead of consensus expectations, following three consecutive months of gains around the 5.5% level.

Ren Zeping, chief economist with Founder Securities, said to Shanghai Securities Journal that the robust increase in CPI for August was primarily due to the impact of the pork cycle and climate factors upon food prices.

According to Ren near-term CPI and PPI rises are unlikely to be pronounced, with data indicating that despite the sizeable month-on-month rise in food prices in August, they still fell by 0.2% compared to the same period last year.

Lian Ping, chief economist with Bank of Communications, expects the diminishing impact of climate conditions to reduce the size of any future food price increases.

According to Lian the chief driver of year-on-year CPI growth trends is carryover effects, which will be especially low over the next few months, meaning that CPI is unlikely to  see further sizeable gains prior to the year’s end.

Lian further points out that the strong PPI rise in August was primarily due to significant gains in prices for ferrous and non-ferrous metals, as the revival of the infrastructure and some parts of the manufacturing sector drove up demand, and overcapacity reductions as well as environmental production caps constrained supply, serving to deter the entry of large flow of capital into the primary products market.

The PPI rebound is nonetheless expected to be short-lived, given that commodity prices are unlikely to post significant increases in future, while demand for industrial goods won’t be able to push prices up much further.

According to Lian carryover effects mean that the PPI increase for the second half of 2017 will be smaller than the first half.

“The PPI rebound is likely a short-term phenomenon, and future gains will further contract.”

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