China: Lower inflation could support further PBoC easing – UOB

Economist at UOB Group Ho Woei Chen, CFA, assesses the latest inflation figures in China.

Key Takeaways

“Headline inflation unexpectedly eased from its 2-year high as it fell to 2.5% y/y in Aug (Bloomberg est: 2.8% y/y, Jul: 2.7%) with food and non-food prices moderating. Core inflation (excluding food & energy) was unchanged from Jul at 0.8% y/y as domestic demand stayed weak amid expanding COVID lockdowns across cities.”

“Producer Price Index (PPI) dropped sharply to 2.3% y/y in Aug (Bloomberg est: 3.2% y/y, Jul: 4.2%). Weaker PPI was attributed to lower international oil and commodity prices as well as weak market demand in some domestic industries.”

“With CPI averaging just 1.9% y/y in Jan-Aug, we now expect full-year inflation at 2.2% instead of our earlier forecast of 2.5% (2021: 0.9%). We also lower our PPI forecast to average 4%-5% in 2022 compared to our earlier estimate of 5%-6% (2021: +8.1%).”

“We continue to see scope for further monetary policy easing, with the 1Y LPR to move lower to 3.55% by end-4Q22 (from current 3.65%). After 35 bps cut YTD, the 5Y rate is still poised to fall further (from current 4.30%) as PBoC extends support to the property market.”