China’s Inflation Beats Market Consensus in August
By Suyang Zhou - Research Analyst
China's industrial and consumer inflation rose 6.3% and 1.8% y-o-y, respectively in August, both beating market consensus.
Before we look into the industrial inflation, let's first look at some leading indicators for industrial prices. In our recent PMI note, we found that output and input prices both recovered further in August. This was clear evidence that Producer Price Index (PPI) would be propped up this month.
On a month-over-month (m-o-m) basis, PPI rose 0.9% m-o-m, accelerating by 0.7 ppt compared to July’s headline reading. Producer costs in the upstream, including mining (+1.8% m-o-m) and raw material (+1.7% m-o-m), were major drivers. This indicates that industrial overcapacity issue has been largely alleviated.
As per the sector-wise, Ferrous Metal Smelting & Pressing (+4.4% m-o-m) increased the most thanks to capacity depletion in the steel industry, followed by Non-ferrous Metal Smelting & Pressing (+3.7% m-o-m), Ferrous Metal Mining (+3.4% m-o-m) and Petroleum, Coking & Nuclear Fuel (+3.3% m-o-m).
The picture is more varied when we turn to the case of year-over-year (y-o-y) growth. The producer prices in the upstream sectors were still flying high compared with prices last year. Coal (+32.1% y-o-y), ferrous metal smelting & pressing (+29.1% y-o-y), petroleum, coking & nuclear fuel (+16.8% y-o-y), and non-ferrous metal smelting & pressing (+16.3% y-o-y) saw double-digit growth in prices.
However, prices in the mid- and down-stream sectors, such as Computer, Telecom & Other Electronic Equipment (-0.2% y-o-y), Automobile (-0.1% y-o-y), Tobacco (0% y-o-y) and General Equipment (+0.8% y-o-y), were trailing low regardless of high cost growth in the upstream sectors. In other words, downstream producers can hardly pass soaring input costs forward to end consumers, which in turn encroaches their margins.
On the other hand, China's consumer inflation accelerated and rose 1.8% y-o-y. The drivers again, came from non-food sectors (+2.3% y-o-y) including healthcare (+5.9% y-o-y), tourism (+3.5% y-o-y), education (+3.3% y-o-y), and residence (+2.7% y-o-y). In total, non-food CPI contributed 78.7% to consumer inflation growth on a year-over-year basis.
By contrast, prices in the food basket were still in deflation (-0.2% y-o-y), but had strong momentum to move towards the positive territory soon. Drilling into the breakdown of a food basket, prices of fresh fruit (-4.2% m-o-m) and aquatic products (-1.1% m-o-m) were the key laggards due to expanded supply. While prices of eggs (+13.5% m-o-m) and fresh vegetables (+8.5% m-o-m) surged as a result of supply shortages and bad weather in the summer.
Core CPI, with volatile food and energy prices excluded, was steadily moving higher to 2.2% y-o-y in August. Looking ahead, core CPI will continue the reflation pace in light of the rising prices of non-food basket, particularly in service prices.