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- We saw overnight that while CPI inflation in China continues to decelerate (+0.7% YoY in September), PPI surprised positively (again) surging by 10.7% YoY, the highest since November 1995 (chart below).
- It is interesting to see that the relationship between the two times series, which was quite strong before the 2008 Financial Crisis, broke down in the past cycle.
- China LT bond yields have been more sensitive to PPI inflation (rather than CPI inflation) in the past 10 years (to the exception of 2021: bond yields have remained low in 2021 despite rising inflationary pressures).
- Hence, we have been attributing more importance to Chinese PPI when computing our liquidity and real money growth indexes.
- We recently saw that major indicators are showing two different outlooks for China PPI inflation:
- On one hand, the sharp contraction in China credit impulse is pricing in a disinflationary outlook in the coming 6 to 12 months;
- On the other hand, the rise in energy commodities with coal futures rising to record levels could continue to send China inflation to new highs in the near term.