China: PPI inflation ease further in December – Nomura

China’s producer price index (PPI) inflation moderated further to 4.9% y-o-y in December 2017 from 5.8% in November, slightly above expectations (Consensus and Nomura: 4.8%), notes the research team at Nomura.

Key Quotes

“The moderation was again due to the high base last year. In month-on-month terms, PPI inflation rose by 0.3 percentage points (pp) to 0.8% in December.”

“The moderation in PPI came mainly in upstream sectors, which experienced a big drop in year-on-year terms, led by the mining and raw materials sectors. Petroleum & natural gas extraction, ferrous metal processing, petroleum processing, non-ferrous metal processing, and coal mining combined subtracted around 0.6pp from headline PPI inflation.”

“Consumer price index (CPI) inflation ticked up to 1.8% y-o-y in December from 1.7% in November, slightly weaker than expected (Consensus and Nomura: 1.9%; Figure 2). In month-on-month terms, CPI inflation rose to 0.3% from 0.0%, mainly driven by higher food prices while non-food price inflation remained at 0.1% for a third month.”

“We expect PPI inflation to continue to moderate in Q1 on a weakening of investment demand, before climbing again in Q2 due to a low base last year. That said, we do see risks to our PPI inflation forecasts as skewed to the upside, given its rebound in monthon-month terms in December. We expect CPI inflation to rise in the coming quarters, likely driven by food and services prices, and the pass-through of high producer and property prices.”

“The Lunar New Year effect (the holiday falling in late January last year but in mid-February this year) will distort year-on-year January CPI inflation lower, but we believe this will be offset by the boost to food prices caused by the extremely cold weather. Taking this into account, we expect year-on-year CPI inflation to be largely stable in January. We maintain our call of a prudent and neutral monetary policy stance through 2018.”