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MNI REALITY CHECK: China CPI To Rise On Higher Service Costs

(MNI) LONDON
BEIJING (MNI)

China's consumer price index should edge higher again in May, pushing further into positive territory, as services and goods prices extend gains as social restrictions ease and higher raw material costs work through, largely offsetting declining food prices, analysts told MNI.

"CPI may rise to 1.6% (y/y) from April's 0.9% gain due to the low comparison base for the same period last year," said Wang Jingwen, a senior researcher at the Pangoal Institution, although on a monthly basis, CPI may continue to decline given the large month-over-month decline in food prices.

FOOD PRICES

Pork prices, the main CPI driver through 2020, continued to fall into May for a 17th consecutive week as supply increased, Wang said, noting that both hog and reproductive sow numbers have rebounded to levels seen before the African Swine Fever.

The average hog prices declined to CNY19.33 per kilo in May, falling 16.57% m/m or 30.07% y/y, close to two-year low, according to Zeng Zihua, chief analyst at EasyHogs Inc, an online community for pig breeders.

"Demand for pork is not very weak, with consumption for the first four months recovering to about 80% of that in same period in 2018," said Zeng, "but there is some oversupply currently." The market is still digesting the sufficient supply coming from larger hogs, with the weight of hogs before slaughter up to 10-20 kilograms heavier than a year earlier.

Though Zeng expects that pork prices may see a moderate rebound as soon as June on a near-term supply gap. Many piglets died in January and February due to swine fevers in some areas while major breeding companies have delivered most of their big hogs, said Zeng, expecting pork prices to rebound 30% from current levels in coming months.

Vegetable prices rose 4% y/y in May, said Su Jian, director of the National Center for Economic Research at Peking University, citing data by the Ministry of Commerce. Considering the weighting of vegetable prices in CPI is about 0.02, it would drive up CPI by 0.1%, said Su.

SERVICES COSTS

As restrictions on large-scale events and gatherings have eased, catering and other service activities have gradually returned to normal levels, said Su. The domestic travel boom seen during the week-long May Day holiday pushed up tourism prices, while clothing prices rose slightly as apparel entered peak season, said Wang.

Higher upstream costs are gradually feeding through to the consumer market, as the increase in refined oil prices have pushed up transportation and energy-related living costs, Wang continued.

The government hiked both domestic gasoline and diesel prices by CNY100 per ton in May, resulting in a rise of about CNY5 to fill a 50 liter fuel tank for private car owners, according to Chen Ling, an analyst at 100PPI.com, a Shandong-based commodity data provider.

By end-May, the wholesale price of gasoline rose CNY100 per ton compared to that at end-April, and that of diesel rose CNY200 per ton, Chen continued.

Gasoline consumption will be buoyed through the peak summer season, said Chen, although she expects any price increase would be moderate in coming month as users have a certain degree of resistance to the current high prices. Gasoline prices in May rose 25% from a year earlier, while diesel prices rose 30%, according to Su.

The median of analysts' expectation for May CPI polled by Bloomberg was 1.5% y/y, up from the 0.9% gain seen in April.

MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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