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The Implications of Chinese March Inflation

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Usually, CPI data from China primarily affects CNH, since it mostly has implications on PBOC policy.

But we aren’t in a “usual” situation. Just like many are looking at China for clues as to how the coronavirus outbreak will progress, many are also tracking the Asian Giant’s economic recovery.

Inflation is one of the many factors to consider in the aftermath of the outbreak as the world economy gets back to producing. The massive stimulus going around is going to take a toll on world currencies.

Depending on how central banks “sterilize” their asset purchases, we could see a major problem with inflation. That, at least, is according to traditional economic models.

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China is Unique, as Usual

Just as their response to the coronavirus outbreak was different (a virtual dictatorship has population control tools at its disposal that more democratic countries don’t have), so too has been their financial and stimulus policy.

For one, by largely containing the outbreak into one province, they didn’t have to engage in such massive stimulus measures.

China probably isn’t a direct analogy for other countries. But, it still can give us some insight into how the economy will react as lockdowns ease in the future.

Just keep in mind that of the major countries, China has proportionally provided the smallest amount of stimulus given the size of their economy.

What we are looking for

Expectations are for monthly CPI to have grown 0.4% in March. This would be a slight slowing of the 0.8% pace in February. A result like this is within the normal range for this figure, showing that analysts don’t expect it to be too impacted by the coronavirus outbreak.

Projections are for annualized CPI to increase to 5.4%, compared to 5.2% prior. This would be a resumption of the increasing pace in inflation since the Chinese government and PBOC started stimulus programs to offset the effects of the tariff war.

The Coronavirus Hangover

Many people have reported surging prices as the services sector in China restarts. This is partially due to increased costs to source ingredients during the shutdowns.

As openings are staggered, competition is lower while demand is higher. This might lead to a momentary bump in inflation.

Whether it will be enough to offset the drop in the prices of raw materials is another question. There is a certain amount of delay in passing through cheaper commodity prices. Gasoline and petroleum derivatives are passed through to consumers faster than lower prices in coal and steel, for example.

The Future

China is a major importer of consumer goods from countries that are not shuttering their economies (and exports) in an attempt to slow the spread of COVID-19.

We’d expect supply constraints to further buoy prices. On the other hand, the Chinese are notorious for saving and might be reluctant to go out and splurge in the uncertain economic situation.

Next week’s trove of economic data will be quite interesting.

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