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August inflation came in at -0.45%, stronger than expected (Barclays: -0.85%; consensus: -0.80%), as a powerful typhoon (Soudelor - on 7-8 August) pushed up food prices. Food prices were up 3.1% y/y (Jul: 1.8%; Jun: 1.9%), led by soaring vegetable (Aug: 14.1% y/y; Jul: 4.0%; Jun: 10.3%) and fruit prices (Aug: 4.6% y/y; Jul: -1.3%; Jun: -3.4%). The jump in food prices also offset the oil drag, which intensified in August as retail pump prices were cut by 4.3% m/m (Jul: -2.7%; Jun: -0.8%).
Core inflation remained generally steady at 0.61% y/y in August (Jul: 0.68%; Jun: 0.59%), edging lower on retail discounts on clothing and household appliances.
"We still see no deflationary risk, as core inflation continues to be supported by solid domestic demand, as evidenced by the relative resilience in services inflation, which stood at 0.8% in August (Jul: 0.9; Jun: 0.8%). As such, we maintain our 2015 inflation forecast at -0.1% and expect inflation to rebound to 2.1% in 2016, on account of a low base and subsequent pickup in oil prices," noted Barclays.
Delving deeper, lower oil prices remain the largest drag on CPI, with its distortion deepening in August and taking away 0.99pp from the headline (Jul: -0.92; Jul: -0.86). This reflected the movement in retail pump prices, with prices of RON95 falling by another 4.25% in August - reflecting the pass through of lower international prices. The distortion was offset by soaring food prices, with vegetables and fruit prices increasing sharply, rising 25.1% m/m (Jul: -4.9%) and 14.1% (Jul: -2.7%), respectively.
Typhoon Soudelor and subsequent torrential rain resulted in crop losses and a higher distribution costs at a time of peak demand (during the traditional Ghost Festival), driving prices higher.
Since China's CNY devaluation on 11 August, the TWD has depreciated 3.6%, in line with the movement of other EM Asian currencies.
CBC is likely to defer to the government stimulus program that was announced on 27 July. Indeed, the CBC has continued to call for the government to do more in terms of expansionary fiscal policy.
