China’s CPI came in at 1.5% YOY in June, and the key manufacturing PPI index rose from 4.6% YOY in May to 5.4% YOY in June. Moderate increases in factory gate prices buoy corporate profits and help Chinese corporations to reduce debt. Citibank economist commented this morning:
“We expect CPI to rise in 2H on higher food prices because of severe floods in South China. PPI inflation is however expected to slow further on a high base. Historically, inclement weather has led to high food inflation in 2H, and CPI inflation is expected to pick up gradually from 1.4%YoY in 2Q, to 2%YoY in 3Q and 2.3%YoY in 4Q, while we expect annual CPI to stay at 1.8%.
We pencil in PPI inflation at 1.9%YoY in 2H, and the annual average PPI is expected to stay at 4.2%. Diminishing PPI inflation suggests reflation won’t be a risk for China this year, and disinflation could become a concern next year.
Regulation tightening may have eased somewhat in 2H to give banks more time for self-inspection assessments and MPA implementation. We expect more active open-market operations to stabilize and even lower onshore money market rates. Today’s inflation figures also suggest that there is limited room for PBoC to tolerate further rate rises in China.”