China: Inflation surprised to the upside in June – UOB

Economist at UOB Group Ho Woei Chen, CFA, comments on the latest inflation figures in the Chinese economy.

Key Quotes

“Headline CPI came in slightly above expectation at 2.5% y/y in Jun (Bloomberg est: 2.4% y/y, May: 2.1%), its highest since Aug 2020. This was mainly due to gains in food and energy prices as core inflation (excluding food & energy) remained modest at just 1.0% y/y in Jun after rising 0.9% y/y in the two preceding months.”

“China’s Producer Price Index (PPI) remains on a moderating trend, as it eased to 6.1% y/y in Jun (Bloomberg est: 6.0% y/y, May: 6.4%). On a sequential comparison, the PPI was flat in Jun vs. a 0.1% m/m gain in May. In our view, the easing cost pressure could be attributed to both weaker global demand and easing supply-side constraints.”

“As inflation has remained muted, the People’s Bank of China (PBoC) is expected to keep its accommodative monetary policy to boost growth but there is less likelihood of more aggressive interest rate cuts as the economy stabilizes and global central banks continue to hike interest rates aggressively. We maintain our forecast for the 1Y LPR to move lower to 3.55% by end-3Q22 from current 3.70% with a modest 5 bps decline per month from Jul.”

“With the upcoming release of China’s 2Q22 GDP and other key macroeconomic data for Jun on Fri (15 Jul), investors will be watching for announcements of further stimulus measures to ramp up growth in 2H22, as the prospect of achieving a full-year growth close to the official target of 5.5% gets more distant.”