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Improvements in Inflation Outlook Would Leave More Room For PBoC Manoeuvre

CHINA
  • Economic data overnight showed that inflation surprised ‘negatively’ in July, with CPI and PPI prints coming in both below analysts’ expectations.
  • PPI inflation, our ‘preferred’ proxy for Chinese inflation, decelerated to 4.2% in July (vs. 4.9% exp.), down from 6.1% the previous month and now down from a 26Y high of 13.5% reached in October last year.
  • In addition to the drop in commodity prices and easing supply bottlenecks, the sharp contraction in Chinese 'liquidity' last year has been pricing in a significant deceleration in inflation in 2022.
  • The top chart shows that the annual change in China ‘liquidity’ has strongly led PPI inflation by 9 months in the past cycle.
  • CPI inflation continued to accelerate in July, rising to a 2-year high at 2.7% (vs. 2.5% the previous month), but came in below analysts’ 2.9% expectations, with some economists speculating that headline inflation is close to a peak and will start to decelerate in the coming months.
  • China Premier Li Keqiang mentioned that China can tolerate a slightly lower growth rate if inflation remains below 3.5%.
  • Hence, improvements in the inflation outlook will give PBoC more room to ease to stimulate the economic activity that has been severely impacted by the zero-Covid policy.

Source: Bloomberg/MNI

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  • Economic data overnight showed that inflation surprised ‘negatively’ in July, with CPI and PPI prints coming in both below analysts’ expectations.
  • PPI inflation, our ‘preferred’ proxy for Chinese inflation, decelerated to 4.2% in July (vs. 4.9% exp.), down from 6.1% the previous month and now down from a 26Y high of 13.5% reached in October last year.
  • In addition to the drop in commodity prices and easing supply bottlenecks, the sharp contraction in Chinese 'liquidity' last year has been pricing in a significant deceleration in inflation in 2022.
  • The top chart shows that the annual change in China ‘liquidity’ has strongly led PPI inflation by 9 months in the past cycle.
  • CPI inflation continued to accelerate in July, rising to a 2-year high at 2.7% (vs. 2.5% the previous month), but came in below analysts’ 2.9% expectations, with some economists speculating that headline inflation is close to a peak and will start to decelerate in the coming months.
  • China Premier Li Keqiang mentioned that China can tolerate a slightly lower growth rate if inflation remains below 3.5%.
  • Hence, improvements in the inflation outlook will give PBoC more room to ease to stimulate the economic activity that has been severely impacted by the zero-Covid policy.

Source: Bloomberg/MNI