MNI REALITY CHECK: China CPI Rise To Stall On Lower Food Costs

The recent acceleration in China's consumer price index may have stalled in June as food prices fell again, led by declining pork prices, although higher fuel costs still offered some support to inflation measures, industry analysts told MNI.

"CPI may slow to 1.1% (y/y) from May's 1.3% gain as falling food prices largely offset other price increases," Zhang Yu, chief analyst at Huachuang Securities said, as noted that excepting aquatic produce, prices of food items fell across the board.

Highlighting the decline in food prices, Wang Jingwen, a senior researcher at the Pangoal Institution said the price index of edible agricultural products tracked by the Ministry of Commerce fell 5.2% m/m in June, declining for a fifth consecutive month. Meanwhile, non-food prices were little changed, which may result in CPI seeing a month-on-month drop of 0.3%, said Wang.

PORK PRICES

Pork prices, the main CPI driver through 2020, continued to fall into June as supply surged with large-weight hogs coming on stream and more frozen meat being imported, Wang said. Prices had, however, recovered somewhat by month end.

"Market pork prices were around CNY24.5 per kilo by end-June, rebounding back to the level in early June after dipping to around CNY20 near month-end," said Jiang Hongxia, staff member at Jiangsu Linjato Market. Summer is normally a slack season for pork consumption, but, encouraged by low prices, sales in the market have more than doubled on year ago levels, said Jiang.

Pork retailers have seen less dramatic price drops than pig breeders, said Zeng Zihua, chief analyst at EasyHogs Inc, an online community for pig breeders.

Zeng noted that the average live hog prices declined to CNY14.98 per kilo in June, falling 22.5% m/m or 54.85% y/y, about two-year low. Hog prices fell as low as CNY12.72 per kilo at one point in the month, before bouncing, a price Zeng sees a likely the year's low.

"Pig breeders have been losing money as prices plummeted, so major breeding companies decided to concentrated on releasing remaining large hogs in mid-June, aiming to find a bottom and then help adjust the supply structure afterward," said Zeng, expecting a price rebound into Q3 as current oversupply ebbs.

The price slump through June triggered a new government early warning system, seeing the state step in and buy 20,000 tons of pork to help prop up the market. "This may help boost breeder confidence," Zhang said although he said the impact on prices could be limited.

Prices of fresh fruits and vegetables continued to fall from last month, with the average price of local vegetables at market CNY2.81 per kilo in June, compared to CNY3.29 in May, said Jiang, noting a less heavy than normal rainy season helping keep local vegetable supplies sufficient.

NON-FOOD PRICES

The government hiked the domestic gasoline and diesel prices twice in June, leading to a total rise of CNY400 and CNY385 per ton respectively. This resulted in a rise of about CNY16 to fill a 50 liter fuel tank with unleaded fuel for private car owners, according to staff at Sinopec. In most gas stations nationwide, the price of unleaded was back above CNY7 per liter.

The monthly average price of domestic gasoline rose by 2.3% in June from May, compared to the previous 2.0% gain, putting a floor under CPI, said Zhang.

The median of analysts' expectation for June CPI polled by Bloomberg was 1.3% y/y, unchanged from the 1.3% gain seen in May.