Faster-than-expected Inflation Growth Will Not Prevent The PBOC From Carrying
Out Easing Measures
March’s factory-gate inflation cooled further to 8.3% yoy, while CPI grew to 1.5% yoy.
Amid price shocks from the Ukraine-Russia war continuing to buffet China’s
inflationary outlook, we still expect the PBOC to extend its easing to limit broadbased economic slowdowns. A higher base comparison is likely to counter the
annual PPI readings, while stringent COVID-19 measures will sap upticks in CPI.
OUR VIEWS
• CPI inflation rebounds on narrowing food deflation. At 1.5% yoy, March’s headline
consumer price inflation (CPI) grew 0.6ppt after staying unchanged for two months and
above market projections (Bloomberg consensus: 1.4% yoy). The acceleration in CPI
inflation mainly reflected a smaller yoy drop in food (-1.5% yoy in Mar 22), as fresh
vegetable and pork prices rebounded. Amid the boost in transportation prices due to
higher cost past-through rates of fuel prices of c.35%, core CPI remains unchanged at
1.1% yoy, from a setback in recreational activities due to stringent measures implemented
to curb the spread of COVID-19.
• Pullback in PPI inflation continues… At 8.3% yoy, the increase in producer price index
(PPI) was 0.5ppt slower than in Feb 22, but above market projections (Bloomberg
consensus: 8.1% yoy). The PPI reading reflected slower growth key in raw material
industries which declined 1.2ppt to 16.7% yoy in Mar 22, as surges in commodity prices
have largely been offset by a higher year-earlier base.
• …but mom gains in the PPI index grew to 1.1% in Mar 22. This is the fastest pace in
five months. Tracking of high-frequency data showed that the Russia-Ukraine conflict
continued to temper a moderation in PPI inflation. Upstream oil price in particular have risen
60% yoy in the first week of April and approximately 50% higher than before the conflict.
Likewise, the input and output price sub-indexes in March’s PMI data also point to increased
sequential momentum.
• Risk tilted to the upside. The upward pressure from higher commodity and energy costs
will continue to slow the moderation in factory-fate inflation while CPI inflation is likely to ride
out the cost-push impulse with sustained COVID-related restriction keeping underlying
inflation in check. Though we note the risks to our forecast are to the upside, we maintain
our forecast for PPI and CPI inflation at 2.5% yoy and 1.5% yoy respectively in 2022. We
expect the government to ramp up its efforts to secure resource supplies and stabilise prices,
while maintaining a flexible stance on energy conservation and emission reduction.