The good news is, core inflation in China is still well in hand, running at just 1.4%, consistent with the generally subdued domestic economic environment.
The bad news is, surging pork prices (up 110% in November) have now driven the headline CPI to the highest since January of 2012.
We’ve covered this for months, and although Tuesday’s data (which showed the headline figure rising to 4.5% in November from 3.8% in October) isn’t a surprise, it was still ahead of consensus, which was looking for a 4.3% gain. Meanwhile, factory gate prices remained mired in deflation.
That divergence has been the subject of vociferous debate. Generally speaking, you don’t want soaring consumer prices and PPI deflation, as that combination puts monetary policy in an impossible bind. If you cut rates to alleviate the lackluster demand concerns evident in the PPI numbers, you risk exacerbating the pain for consumers coping with rising prices.
This is potentially more vexing in China, as policymakers are facing gale force external headwinds (i.e., the trade war), while trying to mark a tedious transition to a more sustainable economic model – and all while attempting to execute on a deleveraging push aimed at ensuring credit growth goes to “productive” sectors of the economy.
The PBoC claims it has a handle on this, and maybe it does. Surging consumer prices didn’t stop the central bank from executing a series of token rate cuts in November and the MoM rise in pork prices moderated considerably last month (3.8% versus 20.1%). Indeed, stripping out that “idiosyncratic” issue, you could easily argue that the real worry in China is the same as it is everywhere else: Deflation.
Still, this is an issue that isn’t just going to vanish into thin air. “Headline CPI inflation is likely to remain elevated in the coming months [as] high frequency data suggest year-on-year inflation in pork prices has remained high in early December, though moderating somewhat”, Goldman said Tuesday, pointing to evidence that fresh vegetable prices “have picked up further in early December in year-on-year terms”. “Elevated inflation could be one factor that may limit the room for front-end rates to decline in coming months”, the bank said.
For their part, ING flagged the above-mentioned sequential moderation. “In November, pork prices rose 3.8% MoM, but this was way down from the 20.1% increase in October, the 19.7% MoM increase in September, and the 23.1% increase in August”, the bank said. “In fact, it was the lowest increase since June (3.6% MoM)”.
Pork accounted for 2.64 percentage points of the 4.5% rise in consumer inflation last month.