China’s consumer price inflation likely to remain stable next year, PPI to edge up in H1 2017

Food prices mainly drive China’s consumer price index and therefore it underestimates the cost of dwellings. Instead, the country’s producer price index, which has higher correlation with economic activities and interest rates, is the preferred indicator, said ANZ in a research report.  Inflation has returned to China as the commodity markets heat up.

The metal prices, particularly steel, and prices of coal explain 37 percent and 11 percent of change of PPI statistically. Given that the government’s enforcement continues to accelerate capacity reductions, the market conditions favour a rebound in prices, stated ANZ.

“We expect China’s PPI to continue to edge up in H1 2017, followed by moderation in H2 when the base effect kicks in”, added ANZ.

For the whole of 2017, consumer price is expected to stay relatively stable. But onshore commodity prices would possibly be volatile as the market would be sensitive to speculative activity and regulatory tightening, on top of economic fundamentals.

As inflation comes back to China, the country’s monetary policy would remain neutral next year. To lower the risk of excessive credit and thus asset price bubbles, policymakers of China could sharpen their policy mandate on price stability. Price targets could be widened to include CP as well as house prices and PPI, added ANZ.