December’s CPI and PPI numbers came broadly in line with market expectations. Despite a seasonal rebound of food prices, headline CPI eased yet again thanks to the continuous slowdown of non-food prices driven by a sharp deceleration of PPI. Prices are still likely to spike temporarily around the Chinese New Year, but the overall inflation trend should continue to normalize through 2012, leaving ample room for Beijing to ease policy to reflate the economy. We remain comfortable with 2.9% y-o-y inflation forecast for 2012 and expect at least another three reserve ratio cuts in 1H2012.
Facts
December’s headline CPI edged down marginally to a 15-month low of 4.1% y-o-y from 4.2% y-o-y in November, broadly in line with market’s expectations for 4% y-o-y though slightly higher than ours of 3.9%.
Seasonally adjusted, headline CPI rose by 0.2% m-o-m compared to 0.1% decline in November, by our estimation. As such, 2011’s full year CPI averaged 5.4%, well above Beijing’s official annual target of 4%.
Besides a favorable base effect (zero contribution), December’s moderation was driven by a deceleration of non-food price growth (1.9% y-o-y in December from 2.2% y-o-y in November, shaving 0.2ppt off headline CPI).
Food prices in contrast picked up from 8.8% y-o-y in November to 9.1% y-o-y in December. The sequential rebound of food prices (1.2% m-o-m, non-seasonally adjusted, vs. 0.8% m-o-m decline in November) reflected a seasonal pick-up in vegetable prices during the colder winter months. More specifically, fresh vegetable prices rose 11.5% y-o-y in December and hence contributing to 0.3ppt to headline CPI, reversing the consecutive y-o-y decline in the previous two months (-11% y-o-y in November).
Meanwhile, pork price inflation eased again to a pace of 21.3% y-o-y in December from 26.5% y-o-y in November.
PPI growth decelerated sharply to 1.7% y-o-y in December from 2.7% y-o-y in November, in line with market expectations, and printing its lowest level since December 2009. Seasonally adjusted, producer prices contracted for the fourth month running, falling by 0.2% m-o-m, by our estimate. In the details, PPI growth for producer goods decelerated to 1.4% y-o-y in December from 2.6% y-o-y in November on the back of weak raw material demand; as PPI growth for consumer goods continued to slow to 2.5% y-o-y in December from 3.1% y-o-y in November.
Implications
Inflationary pressures continue to ease in China, despite the upcoming pre Chinese New Year seasonal spike. Headline CPI will likely rebound slightly in January on the back of a pre Chinese New Year (23 January) surge in demand, which typically lifts headline CPI by more than 1% m-o-m.
Looking into 2012, inflation should no longer be a key policy concern, due to normalizing credit expansion, a moderating GDP growth rate, softening global commodities prices, and the continued delivery of supply-side measures designed to stabilize food prices. We remain comfortable with our CPI projection of 2.9% y-o-y for 2012, compared to 2011’s 5.4%.
Lower concerns for inflation means there is ample room for Beijing to further ease policy in order to reflate growth. The latest meaningful rebound in new loans and money supply growth signals that recent easing measures from Beijing are starting to work. Moreover, the latest newsflow suggests strong momentum in current new loans growth, which will likely translate into a meaningful surge of new loans for the whole month of January. All these should alleviate any market concerns about a hard landing for China.
Today’s inflation data should boost sentiment by enhancing expectations for further easing actions from Beijing to boost domestic demand. We continue to expect at least another 150bp reserve ratio cuts in the next six months, with the next one likely to arrive within weeks.
Bottom line: Inflation pressures remains on track to ease further, despite an impending seasonal spike to come in the final count down to the Chinese New Year. This leaves ample room for Beijing to pursue further easing to boost domestic demand. We expect the next reserve ratio cut to come in a matter of weeks.
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HSBC Global Research