MNI: Pork, Energy Seen As Risks To PBOC Easing In H2

A rise in pork prices and a potential jump in energy costs due to conflict in Ukraine could push Chinese consumer price inflation towards the likely 3% target level in the second half of the year, reducing the space for further easing by the People’s Bank of China, policy advisors and analysts told MNI.

Premier Li Keqiang is likely to announce a CPI target of around 3% at the National People’s Congress on March 5, unchanged from 2021’s objective, a level which could be approached in some months during the second half of the year when currently subdued pork prices correct to the upside, they said.

While higher prices for pork, a key component of the CPI basket, could in themselves constrain room for additional monetary easing from the third quarter, a bigger danger comes from energy, they said. Tightening by the U.S. Federal Reserve may also crimp the PBOC's policy room, advisors have previously told MNI. (see MNI:PBOC RRR Cut In View As Fed Narrows Policy Window-Advisors)

Headline measures of both consumer and producer price inflation would rise more than expected if oil prices surpass USD100 a barrel, though factory-gate inflation should continue an overall downtrend, said Lian Ping, chief economist of Zhixin Investment Research Institute.

PRODUCER PRICES

Producer prices rose 9.1% year-on-year in January, down from a 10.3% rise to December and 4.4 percentage points lower than inflation to October. Consumer price inflation slowed to 0.9% in January from 1.5% the month before.

Absent an energy-cost surge, commodity prices are seen stable in line with IMF forecasts for a slower pace of global economic expansion in 2022, and as countries release oil reserves, Lian said.

Zhang Lu, senior analyst at Pingan Securities, pointed to oil prices as the biggest source of uncertainty for China’s inflation outlook. Crude oil at USD90-100 a barrel would lift mid-point PPI by 0.25 percentage point and CPI by 0.1pp for the year, she said.

There is a risk that CPI could jump to over 3% in September and December, making it more difficult for the PBOC to further ease policy, she said, though she added that inflation will not be a problem for the central bank in the short term.

Policy makers will also be watching to see whether higher factory gate prices pass on into consumer price inflation, said Zhao Quanhou, researcher of the Financial Research Center at the China Academy of Fiscal Sciences under the Ministry of Finance. Consumption should also strengthen as pandemic controls are lifted, further fueling consumer prices this year, Zhao said.