Benign Chinese inflation placates investors

Chinese inflation data

• Chinese annual inflation: Producer prices fell by 1.6 per cent in the year to January (median forecast was for 1.7 per cent decline). Consumer prices rose by 2.5 per cent over the year (median forecast 2.3 per cent).
• Seasonal increase in food prices: In January, consumer prices rose by 1.0 per cent – the biggest increase in 11 months. Food prices rose 2.4 per cent in January ahead of Lunar New Year holiday celebrations while non-food prices rose by 0.3 per cent.

What does it all mean?

• There were few surprises in the latest Chinese inflation data. Producer prices continue to fall, reflecting over-supply in many industries. But annual consumer inflation was steady in January with higher food prices balanced by benign pressures for other goods and services.
• The benign Chinese inflation data removes another potential source of concern for investors. So investors can strike it off the worry list. The other good news this week has been the ‘steady as you go’ testimony from the new US Federal Reserve chair, Janet Yellen; a lift in the US federal debt limit; and better-than-expected growth in Chinese trade data.
• The Aussie dollar should remain in a US89-91 cent range in the short term while the absence of bad global economic news will support the Aussie sharemarket in a 5,200-5,400 point range.

What do the figures show?

Chinese inflation data

• The annual rate of consumer price inflation was steady at 2.5 per cent in January, above forecasts for a result near 2.3 per cent. Over the month consumer prices rose by 1.0 per cent, above forecasts for a 0.7 per cent lift in prices.
• Food prices rose by 2.4 per cent in January ahead of the Lunar New Year holiday with non-food prices up by 0.3 per cent. Over the year to January, food prices rose by 3.7 per cent while non-food prices were up by 1.9 per cent (11 month high).
• Food: Prices of fresh vegetables rose by 12.1 per cent in January with fruit up 11.0 per cent. Meat & poultry prices were unchanged with pork down 1.0 per cent (higher pig numbers), beef up 1.7 per cent and lamb up 1.3 per cent.
• Other prices: Clothing prices fell 0.5 per cent in January; tobacco & liquor fell 0.3 per cent; transport & communications rose 0.4 per cent; household equipment & maintenance rose by 0.4 per cent; healthcare & personal products rose by 0.3 per cent; entertainment & educational rose by 1.0 per cent (travel up 5.5 per cent or 14.9 per cent annual); living costs (including rents, utilities) rose by 0.2 per cent.
• Producer prices (business inflation) fell by 0.1 per cent in January – the first fall in six months. Producer prices in November were 1.6 per cent lower than a year ago, the biggest annual decline in five months. Economists had tipped a 1.7 per cent annual decline.
• Mining producer prices rose by 0.4 per cent in January but were down 4.0 per cent over the year. Raw material prices were unchanged in January (down 2.5 per cent annual); machined goods fell 0.1 per cent in January (down 1.7 per cent annual). Over the year prices fell most in coal mining (down 9.4 per cent) but rose most in gas production (up 5.1 per cent).
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
• Chinese exports & imports are growing, pointing to a healthy economy, while inflation is contained. The easing in food inflation is encouraging for Chinese policymakers but the slight lift in core inflation is not a concern. There are few sources of angst for Aussie investors at present.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. 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 exports & imports are growing, pointing to a healthy economy, while inflation is contained. The easing in food inflation is encouraging for Chinese policymakers but the slight lift in core inflation is not a concern. There are few sources of angst for Aussie investors at present.