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The year-on-year Consumer Price Index (CPI) to rise gradually in the coming months, as the high base effect of food prices starts to moderate. The CPI rose 1.5 percent y/y in May compared with 1.2 percent in April, as the decline in food prices eased. Non-food prices rose by 2.3 percent y/y in May while food prices declined by 1.6 percent.
"As the high base of food prices start to moderate in the coming months, we expect the CPI to embark on a gradually rising path. We maintain our annual CPI forecast of 2.4 percent for 2017," ANZ Research commented in its latest report.
Producer price index (PPI) inflation continued to slow in May to 5.5 percent y/y (or -0.3 percent m/m), signalling a lower trend in the rest of the year. This is in line with our view stated in the past two months that China’s PPI inflation should have peaked in February and then will start to slow. We estimate that annual average PPI inflation is likely to be around 5 percent for 2017.
The combination of slowing PPI inflation and rising funding cost leads to a rise in real interest rates for corporates. According to the quarterly PBoC’s Monetary Policy Report, the average loan interest rose to 5.53 percent at the end of Q1 2017, compared with 5.27 percent at the end of 2016.
