MNI: China Inflation Surge Limits Policy Space

Headline inflation in China is facing upward pressure even as overall weak demand erodes underlying prices, adding to challenges for monetary policy, according to analysts after the pace of increases in CPI unexpectedly broke 2%.

Imported inflation may continue for a longer time as the Russia-Ukraine war smoulders on, and pork prices, an important driver of CPI, may rebound in the second half of the year, according to Sheng Songcheng, a former director of the Statistics and Analysis Department of the People's Bank of China, who wrote in a blog post. (See:MNI: Imports Fuel China Inflation, PBOC To Keep Easing-Advisors)

CPI rose 2.1% y/y to hit a five-month high pace in April, quickening from March’s 1.5% and exceeding a 1.8% forecast. The highest inflation this year was driven by the bottoming out of pork prices, higher food prices due to hoarding and supply constraints amid Covid-19 outbreaks as well as rising international commodity prices, according to analysts from China Minsheng Bank on their WeChat account.

With the government collecting pork for reserves and adjusting hog capacity, pork prices fell by 33.3% y/y, though this pace of decline moderated by 8.1 percentage points compared to the previous month. Petrol, diesel and LPG prices rose 29.0%, 31.7% and 26.9% y/y, respectively, according to the statement from the National Bureau of Statistics.

Even as headline CPI spiked, core inflation excluding food and energy prices slowed to 0.9%, the lowest in ten months.

MONETARY POLICY

Monetary policy faces a dilemma, as weak demand brought about by the epidemic calls for easing policies, but overall inflationary pressure has increased, the analysts noted, adding that global interest rate hikes also further constrain the space for policy.

Sheng suggested that the PBOC could pay more attention to the use of quantitative tools to actively work with fiscal policy to buoy economic growth and buffer the spillover effects from the Fed's monetary tightening and imported inflationary pressures.

PPI, measuring factory gate prices, further eased for the sixth month to 8.0% y/y from March's 8.3% y/y. Though international commodity prices remained strong with Russia’s cut-off of natural gas supplies to some countries, domestic Covid lockdowns limited price increases in oil, causing it to fall back from its high level, according to the analysts.

PPI may continue with its overall downward trend, but the transmission from PPI to CPI is accelerating with prices of daily necessities and manufacturing goods picking up monthly at an increasing pace, the analysts added.