Last night, Chinese CPI came in hotter than expected.
This is problematic, since the economy is weakening, and any extra inflation means less breathing room for the People’s Bank of China to ease policy.
Mamta Badkar walked through all of the data here.
Anyway, one chart that stands out is the chart of the pork price inflation. With pork being such a crucial part of the Chinese diet, this is always a big red flag. You can see that the month-over-month change in pork prices was the biggest spike this year.
Rising inflation limits the room for policy easing and reinforces our view that credit and money growth will continue to drop in coming months. We expect CPI inflation to remain at around 2.7% in Q3, then climb to above 3% in Q4. This will limit the ability of the People‟s Bank of China to cut the benchmark deposit rate, which is at 3%. The rise in pork prices poses further upside risks to CPI inflation. We maintain our view that GDP growth will trend down in H2 to 7.3% and we assign a 30% chance to GDP growth falling below 7% in either Q3 or Q4
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