China's disinflation driven by food and energy

Headline CPI inflation fell in May, fuelling speculation of more rate cuts. CPI dropped 0.2% m/m, and the y/y reading fell to 1.2% in May from 1.5% in April. PPI edged down 0.1% m/m, with the y/y reading unchanged at -4.6%, notes Standard Chartered. Both indicators were lower than expected. With the real interest rate (the benchmark one-year deposit rate minus y/y CPI inflation) again rising above 1%, expectations of another benchmark rate cut have strengthened.

Disinflation so far this year has been driven by food and energy prices, while core inflation has been relatively stable. Headline CPI inflation averaged 1.3% y/y in January-May, 1.1ppt lower than the average during 2012-14. Core inflation (headline inflation excluding food and energy) averaged 1.5% y/y in January-May, only 0.1ppt lower than the 2012-14 average. YTD food inflation was zero in January-May 2015, compared with 2.3% in 2012, 1.3% in 2013 and 1.3% in 2014. 

Prices for energy-related items continue to fall: for example, fuel prices dropped 16-17% y/y in January-May. Services inflation remained steady in May, at 0.1% m/m and 2.1% y/y (unchanged from April). Non-food inflation edged up to 1.0% y/y in May, after staying below 1.0% from December 2014 to April 2015. The core and non-food inflation trajectories suggest limited further downside to CPI inflation unless food and energy prices continue to exert downward pressure, adds Standard Chartered.