ECONOMIST: Chinese Consumer Prices Are Being Held Down By A Stronger Yuan

Chinese consumer prices were up 2.5% year-over-year in January.

This was modestly above expectations for a 2.4% rise and compares with a 2.5% rise the previous month.

Meanwhile, producer prices fell 1.6% YoY in line with expectations. This compares with a 1.4% fall the previous month.

The prices of fresh fruits and vegetables jumped 2.4% on the month, compared to 0.6% in December.

Importantly service price inflation was up 3.7%, above the 2% rise in the inflation of goods prices.

“Prices of services are the Chinese CPI report’s most sensitive measure of underlying inflation pressures,” said Bill Adams, senior international economist for PNC Financial Services Group

in a note. “This month’s relatively high service price inflation shows that price pressures are intense.”

But Adams points out that headline consumer prices have been held down by “a strong yuan”, as the central bank hasn’t let the currency depreciate, like other emerging markets currencies. From Adams:

“It bears emphasising that while the yuan isn’t moving much against the U.S. dollar this year, it is dramatically stronger vis-a-vis other emerging market currencies like the Mexican peso, Brazilian real, or Indian rupee. The yuan’s strength is another headwind to labour intensive manufacturing in China. To Chinese policymakers, structural weakness in labour-intensive export sectors probably seems like a price worth paying to keep inflation so much better controlled than it is in other emerging markets in 2014.”

But as headline inflation stays below the central bank’s 3.5% target, monetary policy should be neutral.

“The well below 3.0% CPI inflation could be good news for markets as monetary tightening is not justified,” writes Bank of America’s Ting Lu.

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