The Far Reach of Upcoming China CPI Figures

Expectations are for inflation to have picked up in June, following a 4-month slump.

The reasons for it are mostly internal, but a lot of analysts are following Chinese economic data closely to see what might happen when other economies reopen.

There are differing opinions on where Chinese inflation will go for the rest of the year. Some predict deflation, others relatively steady prices, and others hyperinflation.

The official BPOC analysis is for a “steady” inflation rate of around 3% average for the year. However, they do admit to expecting some fluctuation. We can expect this early deflation to be offset by increased inflation later.

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Don’t Forget the Pigs

For most countries when we are talking about macro data, we tend to focus on the impact of COVID.

In China, however, the price of hogs is seen as the largest driver in inflation trends, at least for the last year. And there is reason to be concerned.

The drop in inflation over the last four months has been attributed to the government taking action to deal with the increased cost of pork after a swine flu outbreak in 2019.

But, once again, there is a concern of another swine pandemic – and this time transmissible to, and by, humans.

Should China have to resort to culling the hog population again, increased inflation might be inevitable despite the underlying situation of the economy.

The Capital

Following the recent COVID outbreak in Beijing, demand has returned for catering. Expectations are for this to have driven up the price of pork and vegetables outside of seasonal factors.

Another factor is the availability of fresh fruit, which relies on exports from countries that are seeing the effects of COVID, plus a restriction on the amount of shipping capacity available.

Freight forwarders report delays in shipping of items that are increasing in popularity in China, such as avocados, bananas, and salmon.

What We are Looking For

Projections are for the monthly change in CPI for June to come in at 0.0%. This is in comparison to -0.8% in May, showing a substantial increase and the largest move since the COVID outbreak.

On an annualized basis, expectations are for inflation to come in at 2.8% compared to 2.4% last month.

Should expectations be borne out, inflation would be back into the range it was before the spike caused by the swine flu outbreak last year. The rest of the economy, however, still needs to play catch up.

As an example, retail auto sales in June were down -8% year-over-year.

The official line is that China is recovering “gradually”. Therefore, we can neither expect inflation nor deflation.

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