China: Inflation loses traction in October – UOB

Economist at UOB Group Ho Woei Chen reviews the latest inflation figures in the Chinese economy.

Key Takeaways

“Headline CPI inflation eased to just 2.1% y/y in Oct, lowest since Apr-May when the inflation was also at 2.1% y/y. Tightened COVID curbs took a toll on domestic demand as core inflation (excluding food & energy) remained at an 18-month low of 0.6% y/y.”

“Inflation had averaged 2.0% y/y in Jan-Oct with full-year 2022 inflation likely well-below our forecast of 2.2% (2021: 0.9%). We keep our 2023 inflation forecast at 2.8% given expectation that China will ease its zero-COVID policy and start to reopen its borders.”

“PPI dipped into deflation for the first time since Dec 2020, to -1.3% y/y in Oct. A high comparison base will likely keep PPI in deflation through 1H23 while uncertainties remain for global commodity price movements that could affect the costs for producers.”

“We continue to see full-year PPI averaging 4.0-4.5% for 2022 (2021: +8.1%) and expect the PPI to be flat in 2023 as we factor in weaker global demand and expected PPI deflation in 1H23.”

“The disinflation pressure will likely stay in place until China starts to ease its strict zero-COVID policy. The PBoC may further ease its monetary policy amid weaker outlook for the economy.”