MNI Data Analysis: China CPI,PPI Above Expected, Under Control

--CPI Suffers From Base Effect; Medical Costs Again Lead Gains

--PPI Boosted By Government Capacity Cuts, Pollution Control Program

     BEIJING (MNI) - China's consumer price index (CPI) and producer price index

(PPI) both rose more than expected in October, but remained well below the

government limit for the year and also below last year's level.

     CPI was boosted by an unfavorable base effect and continued strong gains in

medical care costs. 

     PPI was boosted by the government's campaigns to cut excess industrial

capacity and control air pollution this winter, both of which have cut supplies

and raised prices of some commodities and basic materials. 

     CONSUMER PRICE INDEX

     The CPI grew 1.9% year-on-year in October, higher than the MNI survey

median forecast for a rise of 1.8%, yet still well below the Chinese

government's target to keep 2017 CPI under 3%. October CPI growth was above the

1.6% rise recorded in September and the highest since January's 2.5%.

     Still, inflation remains under control, with year-to-date consumer

inflation this year well below last year. In the first 10 months of this year,

the CPI averaged 1.5% vs. 2.0% in the same period last year.

     The year-on-year inflation rate in October also suffered from an

unfavorable base effect. The CPI rose 0.1% m/m in October, a major drop from the

0.5% m/m growth in September, but above the 0.1% m/m decline posted in October a

year ago. The CPI base effect will improve in the next two months, given gains

of 0.1% in November and 0.2% in December last year. 

     The higher-than-expected y/y CPI growth was buoyed by a strong 2.4% price

rise in non-food categories, the same growth rate as in September. All non-food

categories saw y/y price gains. Healthcare cost growth stood out, with the

highest growth among non-food categories at 7.2%, continuing its strong

months-long rise and 4.4 percentage points above price growth in the

next-highest category, residential costs (+2.8%). The rise of education and

entertainment prices (+2.3%), other goods and services (+1.8%), necessities and

life services (+1.5%), garments (+1.2%), transportation and telecommunication

(+0.8), and food, beverage and alcohol (+0.3%) followed.

     Food prices continued to drop but at a slower rate. Food prices dropped

0.4% y/y in October, much slower than the 1.4% decline in September. Pork prices

dropped 10.1% y/y, edible oil prices were down 0.8% and fruit prices fell 0.7%. 

     Deng Haiqing, chief economist at JZ Securities, expressed optimism about

the consumer price outlook. Future inflation will not be large due to the

limited room for food prices to continue increasing, which, together with an

expected economic slowdown and commodity price declines, would put a lid on

price pressures, he said. 

     The m/m CPI growth was also boosted by growth in non-food products and

services. Garment prices led the growth among the sub-categories at 0.5%,

followed by price growth of residential, necessities and life services;

transportation and telecommunications; and healthcare, which all rose 0.2%. 

     Food price growth, on the other hand, was unchanged m/m in October,

compared with the 0.5% gain in September, reflecting its contribution to the m/m

growth acceleration in October. 

     Sheng Guoqing, a senior statistician at the National Bureau of Statistics,

said in a statement that demand for food declined after the week-long National

Day holiday in early October -- with the price of eggs falling 5.4% m/m, seafood

down 0.6% and pork prices dropping 0.1%.

     PRODUCER PRICE INDEX

     The PPI confounded economists' expectations for a deceleration to 6.6% in

October, remaining at the same 6.9% rate posted in September. The rise in the

index reflected robust domestic demand and was influenced by China's ongoing

campaigns to cut excess production capacity and reduce pollution this winter,

which have led to a rise in commodity and basic goods prices. The October growth

rate was the highest since 7.6% in March.

     From January to October this year, the PPI climbed 6.5%, a dramatic

contrast with the 2.5% drop in the same period last year.

     The y/y PPI climb was led by a 14.7% surge in mining product prices and a

11.6% hike in raw material prices.

     Deng Haiqing of JZ Securities said that the higher-than-expected PPI growth

came despite a favorable base effect this year, underscoring the strong momentum

of producer prices. 

     Monthly growth of the PPI slowed to 0.7%, lower than the 1.0% growth in

September, but the same m/m growth rate as in October last year. The m/m

deceleration was led by slower price growth of 0.5 percentage point in raw

materials, 0.4 percentage point in processing, and 0.3 percentage point growth

in food.

     Given that the year-ago base is expected to edge up in coming months, and

commodity prices are expected to decline, the peak of the PPI may be at hand,

Deng argued. 

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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