China’s March CPI data showed that inflation is not an immediate concern. A decline in the annual rate of inflation had been expected following the excesses of the Lunar New Year holiday and related (mostly food) price increase, but the drop in the annual rate from 3.2% in February to 2.1% in March was lower than market expectations of a decline to around 2.5%.
Food prices fell 2.7% over the month which
took the annual rate from 6.0% in February to 2.7% in March. Non-food inflation rose 0.1% over the month
for an annual increase of 1.8%. Non-food
inflation has now spent the best part of 18 months below 2.0%.
While the decline over the month was larger
than expected we continue to believe we are past the low point in the China
inflation cycle. However, we expect the
modest nature of the recovery in growth and relatively high levels of excess
capacity in the manufacturing sector will keep the upward trend gradual (annual
PPI deflation went from -1.6% in February to -1.9% in March). We are also keeping a close eye, as will the
PBoC, on food (pork) prices.
The good news is that given this latest
result, the starting point will be from a lower base. That’s not insignificant in light of the
recently announced inflation target of 3.5% for 2013 which is lower than the
4.0% target in 2012.
There has been a bit of consternation
recently about efforts by the Chinese authorities to contain the recovery in
the housing market. I think it’s
actually a good thing. The authorities are keen not to inflate another residential
property market bubble and in so-doing are likely to delay the need for a
broader monetary policy response (read interest rate increases) until
2014. That a positive for the broader