Chinese New Year boosts Inflation. China’s annual inflation rate rose from 4.1 per cent to 4.5 per cent in January – above expectations. Over the month inflation rose by 1.5 per cent after rising 0.3 per cent in December.
Food prices rose by a sizeable 10.5 per cent over the year to January, while non-food prices rose by 1.8 per cent – a 15-month low.
Producer prices (business inflation) fell from an annualised rate of 1.7 per cent to 0.7 per cent in January – marking the weakest reading in just over two years.
What does it all mean?
The top line Chinese inflation reading certainly doesn’t read too well. Inflation picked up pace surging by 1.5 per cent in the month of January and the first reactions by share markets and currency markets were negative. However that is where the bad new ends.
The higher-than-expected inflation reading was dominated by the earlier than-usual celebration of Chinese New Year and the resulting spike in prices over the holiday season. In fact it was the earliest start to a Chinese New Year since 2004.
This may explain why inflation in the subsector “recreation, education and culture” rose at a 0.7 per cent annual pace – marking the fastest growth pace in 12 months.
The main driver of the latest result was food inflation, which gathered pace and was growing at 10.5 per cent annual pace. And while food inflation has been the real problem in China for the past year, policymakers need to be commended for ensuring that higher food prices have not translated through to the broader economy. In fact non-food inflation across China is growing at a 1.8 per cent annual rate – the slowest pace in 15 months.
The other solace for policymakers is that producer prices (business inflation) went backwards in the month, and from an annual sense was growing at the slowest pace in over two years. Clearly if businesses are not seeing a significant pick up in prices this should ensure minimum pass-through effect to consumers. This represents further confirmation on the low economy-wide non-food inflation reading.
Overall, given the early timing of the Chinese lunar holiday, we will have to wait for the February inflation data to get a clearer picture of the inflation landscape. But what is clear is that activity levels have been pared back and that 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 will only loosen policy in modest doses. And while we expect the reserve ratio to be cut in coming months, at present authorities seem focused on using other tools like open market operations to inject liquidity and offset the recent outflow of foreign funds.
In fact in the lead up to the New Year holidays, through open market operations the People’s Bank of China injected 352 billion Yuan into the system, which was roughly equivalent to the liquidity injected by the 50 basis point RRR cut announced late last year.
Importantly in a sign that they are more comfortable with the inflation outlook, authorities recent lifted retail fuel prices by 3-4 per cent – an adjustment that would have been warranted last year but did not take place as a result of the uncomfortably high inflation environment. It is anticipated the lift in fuel prices may add 0.2 percentage points to headline CPI in February with possible secondary pass-through in coming months.
There is no question that there are downside risks to the global economy. The longer that the European debt crisis dominates market sentiment, the more significant the impact will be on Chinese exports – especially given that around 40 per cent of Chinese exports are consumed by Euro Zone. However if the European debt crisis escalates it is likely that policymakers in China will ramp up stimulus to ensure that the sustainable growth story remains in intact.
What do the figures show?
Chinese inflation data
- The annual rate of consumer price inflation rose from 4.1 per cent to 4.5 per cent in January. Over the month inflation rose by 1.5 per cent after rising by 0.3 per cent in December.
- Food prices were up 10.5 per cent on a year ago (9.1 per cent in December), while non-food prices eased from 1.9 per cent to 1.8 per cent in January – a 15-month low.
- Producer prices (business inflation) grew by 0.7 per cent in the year to January (26-month low), down from the 1.7 per cent annualised rate in December. Producer prices fell 0.1 per cent in the month.
What is the importance of the economic 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?
Investors are still waiting for the full suite of Chinese monthly economic data. In terms of inflation, the mixed news will ensure that Chinese authorities will be watchful. Non-food inflation has been encouragingly subdued, pointing to further easing of policy 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.
From a domestic perspective the slowdown in China and ongoing concerns in Europe is likely to dominate the Reserve Bank’s thoughts. And if external shocks gather pace, the Reserve Bank will look to stimulate further by cutting rates once again.
