China: In-line CPI inflation, below-expected PPI deflation – ING

Tim Condon, Chief Economist at ING, suggests that China’s elevated CPI inflation, though unrelated to monetary policy, and narrowing PPI deflation undermine the case for PBOC policy interest rate cuts.

Key Quotes

“April CPI inflation was unchanged at March’s 2.3% YoY. The increase in the food component was 7.4% (prior 7.6%) and the increase in the non-food component was 1.1% (prior 1.0%). Core inflation was unchanged at 1.5%.

The food component remains a problem. Weather-related supply disruptions caused an unusually large January-February increase whose retracement was curbed in April by a spike in the pork subcomponent. We expect the food component to support inflation all year and our full-year CPI forecast is 2.0% (consensus 2.0%), up from 1.4% last year.

PPI deflation narrowed to -3.4% in April from -4.3% in March (consensus -3.7%). As in March there was relief across the main components – mining and quarrying, raw materials and manufacturing. We believe the firming of global oil prices is responsible for the narrowing PPI deflation. On ING’s forecast, which has Brent at US$40 at yearend, the year-over-year declines will narrow steadily, which we expect will mean the same for China’s PPI deflation. Our full-year forecast is -3.3% (consensus -4.0%).

Elevated CPI inflation, though unrelated to monetary policy, and narrowing PPI deflation undermine the case for PBOC policy interest rate cuts. We are reviewing our forecast of two 25bp PBOC in the rest of the year (Bloomberg consensus is one 25bp cut).”