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Analysts have taken the view that Chinese producer and consumer price inflation is likely to diverge in coming months, but with little impact on the outlook for monetary policy.
Data on Wednesday showed producer prices moderated in March from an eight-year high, partly thanks to a pullback in prices for oil and gas extraction, as well as chemicals and their related products.
Meanwhile, the rise in consumer inflation was kept in check by a drop in price for food & vegetables, although most economists think this should soon pass through and prices for the overall basket should begin heading north in coming months.
That is in contrast to producer prices, which economists think will begin to moderate.
Here are analysts’ reactions.
Hao Zhou at Commerzbank: thinks producer price inflation peaked in February. He adds:
The big gap between CPI and PPI points to the fact that there is little pass-through effect from upstream commodity prices to downstream consumer goods, indicating that we haven’t seen a solid recovery yet. However, today’s data will have limited impact on the overall monetary policy. The overall policy tone will remain generally cautious as the authorities intend to cool down the property market and deleverage the banks’ off-balance sheet financing.
Julian Evans-Pritchard at Capital Economics:
We expect producer price inflation to drop back further during the coming months as base effects become less favourable and economic activity begins to cool on the back of a tighter policy stance. Consumer price inflation may regain some ground but should remain below 2.0%. The upshot is that those anticipating a further reflation in China are likely to be disappointed.
Yang Zhao at Nomura:
We expect PPI inflation to continue to moderate in the coming months and CPI inflation to rise due to pass-through from high property prices and the high PPI. However, we believe that overall, inflationary pressures are benign. As such, we maintain our call of a neutral and prudent monetary policy stance with a tightening bias. We still expect a 50bp cut to the reserve requirement ratio in H2 2017.
David Qu at ANZ Banking Group:
The data is unlikely to change the People’s Bank of China’s (PBoC) tightening bias. The still-strong PPI should keep producers’ profits at a reasonable level, which, when combined with the stable CPI outlook, allows the PBoC to focus on deleverage. Actually, the PBoC has presented a clear tightening bias as they have skipped the reverse repo for 13 days in a row.
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