China: Inflation loses traction in February – UOB

Economist at UOB Group Ho Woei Chen reviews the latest inflation figures in China.

Key Takeaways

“Headline inflation slowed to 1.0% y/y in Feb, the lowest in a year, with easing price pressure seen across both food and non-food components. This indicates that the recovery in domestic demand is not on solid grounds yet.”

“Despite the weaker than expected inflation outturn year-to-date, we are keeping our forecast for headline inflation at 2.8% this year (2022: 2.0%) as we monitor the pick-up in price gains ahead, particularly in 2H23 as the economy is expected to return to stronger fundamentals.”

“The PPI remained in deflation for the fifth consecutive month, which worsened to -1.4% y/y in Feb (Bloomberg est: -1.3% y/y, Jan: -0.8% y/y). This was again attributed to a high base comparison particularly high oil prices while the National Bureau of Statistics said that the production recovery of industrial enterprises has accelerated, and market demand has improved. On a sequential basis, PPI was flat after falling in the two preceding months.”

“For the full year in 2023, PPI could be slightly negative at -1.0% after rising 4.1% in 2022 and 8.1% in 2021.”

“People’s Bank of China (PBOC) indicated there may be little room for policy adjustment this year as the real interest rates are at a relatively appropriate level.  We will review our LPR forecasts after the rate setting on 20 Mar. Although we have factored in a 10bps cut to the LPRs by end-1Q23, the prospect of that happening has weakened. More important to watch will be the 5Y LPR as a reduction to the rate will signal strong government support to the real estate sector.”