China economy Markets

PBoC Policy Headache Gets Worse As China’s Inflation Soars To Seven-Year High

A bad mix.

Consumer inflation soared to a seven-year high in China in October, data out Saturday showed, potentially making it more difficult for the central bank to ease in the interest of shoring up the world’s second largest economy which grew at the slowest pace in three decades during the third quarter.

The consumer price index jumped 3.8% last month, more than the 3.4% analysts and economists expected. That marks a sharp acceleration from the 3% prices grew in September.

Meanwhile, PPI deflation remains entrenched. Factory prices dropped 1.6% in October, more than expected, further underscoring the policy dilemma.

As noted when PPI deflation first reared its ugly head over the summer, that’s a drag on the outlook for global inflation, and works at cross purposes with central banks’ efforts to reflate.

At yet, exploding pork prices are dragging consumer inflation higher in China, putting local monetary policy in something of a bind – cutting rates (or otherwise easing policy) risks exacerbating the situation on the CPI side even as it may help alleviate the weak momentum evident in falling PPI.

Pork prices rose 101.3%, according to the NBS. Food prices surged 15.5%. Together, food, alcohol and tobacco accounted for nearly 3.4% of the 3.8% CPI rise (they jumped 11.4% as a category).

In all likelihood, the PBoC will err on the side of fighting PPI deflation, especially given the domestic demand concerns that are clearly showing up in flagging imports and slumping auto sales. Indeed, Beijing cut the MLF rate by a token 5bps last week.

Read more: China’s Yuan Rides Hot Streak Amid Trade Optimism. Exports Stabilize, But Imports, Car Sales Slide

Still, this isn’t a good problem to have. It ostensibly constrains the PBoC in the event Beijing did decide to go the “kitchen sink” route with stimulus.

In addition to making the pain from the CPI surge worse, any currency weakness which may accompany “big league” (sorry) easing would also risk aggravating the White House at a delicate juncture.


 

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