The latest inflation data out of China has certainly been encouraging. Inflation has topped out and is now tracking lower. And more importantly inflation has the potential to moderate even further, as the measures put in place by Chinese authorities over the last few months to cap food prices and slow growth have the desired longer term effects.
The latest result is something that we have been expecting for a few months now especially given that the real problem has been rising food inflation while non-food inflation has held steady at around 3 per cent. And in addition overall inflation has been barely growing on a monthly basis posting sedate results around 0.1-0.3 per cent – a far cry from the 1-2 per cent monthly increases that were taking place late last year. And as the higher readings continue to roll off, annualised inflation looks set to fall even more so in coming months.
Overall it does seem that activity levels have been pared back and the more restrictive policy measures will continue to have a dampening effect in the near term.
Going forward, China’s policymakers will remain vigilant against the inflationary threat and if necessary will continue to tighten policy. And while equity markets may react adversely to a slowdown in activity levels it will lead to a more sustainable growth story in the longer term. Keep in mind that if the economy slows too quickly authorities have ample tools available to turn on the stimulus tap.
What is the importance of this data?
China’s National Bureau of Statistics releases its monthly economic statistics around the middle of each month. Quarterly GDP data is released around the 16th of January, April, July and October. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
What are the implications for interest rates and investors?
Chinese authorities have been active in tightening monetary policy over the past year. And while some parts of the economy have responded, it will take time for the full impact to be seen. Overall, however, activity levels have eased.
Investors are still waiting for the full suite of Chinese monthly economic data. In terms of inflation, it is a case of so far so good. Non-food inflation has been little changed the past three months, pointing to further easing of the annual rate over the second half of 2011. But the central bank needs to be watchful, especially with the annual rate of producer price inflation still uncomfortably high.