beyondbrics

Both pessimists and optimists found something to talk about in China’s December inflation figures. The headline number – a CPI rise of 4.1 per cent year-on-year – was just enough to show overall inflation is still falling in China.

But the details could be seen as reason for further caution.

First the bull’s case. Inflation is still falling. At 4.1 per cent, the December print is only a squeak above consensus, and still represents a decline from November’s 4.2 per cent.

What’s more, input pressure kept falling too. The y-o-y increase of 1.7 per cent in PPI was the lowest since December 2009, said HSBC’s Qu Hongbin, who thinks the latest data will herald fresh easing.

Inflation pressures remains on track to ease further, despite an impending seasonal spike to come in the final count down to the Chinese New Year. This leaves ample room for Beijing to pursue further easing to boost domestic demand. We expect the next reserve ratio cut to come in a matter of weeks.

But there’s an alternative view. While inflation fell, it didn’t fall by much. Why? Because food prices started going up again – something Beijing tends not to like.

In fact, month-on-month, food prices went up 1.7 per cent, the first monthly increase since July (when inflation hit 6.5 per cent). This from Li Cui at RBS:

The earlier improvement [in food prices] was driven by the enhanced supply conditions (in particular those for vegetables). However the impact appears short-lived…

…with inflation risks persisting, and in the absence of sharper than expected economic slowdown, we continue to put low probability on monetary policy easing.

So now focus will switch to next week’s GDP figure. Expectations are for a number around 8.5 per cent. Anything lower, and expect policymakers to blink.

Related reading:
China tames ‘vicious tiger’ of inflation, FT
China’s inflation victory comes with high price, FT
China loans: Beijing greases the wheels, beyondbrics
Thai inflation falls, follows Asian trend, beyondbrics