August 10, 2022 09:57 GMT
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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.