China: Downside surprise in inflation numbers – Nomura

Analysts at Nomura explain that China’s Producer price index (PPI) inflation softened by 0.6 percentage points (pp) to a weaker-than-expected 3.1% y-o-y in March, a fifth month of continued moderation (Consensus and Nomura: 3.3%).

Key Quotes

“The moderation was again dragged by upstream sectors. PPI inflation in the mining sector fell by 1.4pp to 5.0% y-o-y, while PPI inflation for raw materials and processing & assembly fell by 0.8pp and 0.5pp, respectively. In month-on-month terms, PPI inflation edged down to -0.2% from -0.1% in February.”

“After the 52-month high of 2.9% y-o-y in February caused by the moving lunar new year holiday effect, consumer price index (CPI) inflation fell to a much weaker-than-expected 2.1% y-o-y in March (Consensus and Nomura: 2.6%), mainly due to falling food price inflation, which dropped to 2.1% y-o-y from 4.4% in February. Non-food price inflation also edged down by 0.4pp to 2.1% y-o-y. On a month-on-month basis, CPI inflation eased to -1.1% in March from 1.2% in February.”

“We expect a temporary rebound in PPI inflation in Q2 due to the low base last year but the downtrend to resume in H2 2018 due to the outlook of weakening investment demand, given a cooling property market and already high financing costs. We maintain our call for a mild pickup in CPI inflation through 2018, likely driven by higher food and services prices, and the pass-through of high producer and property prices.”