Headline numbers show that Chinese CPI rose 3.6 per cent year-over-year (YoY) in March from 3.2 per cent in February. Meanwhile PPI fell 0.3 per cent YoY from 0 per cent the previous month.But Ting Lu, China economist for Bank of America-Merrill Lynch, said CPI inflation actually fell in March:
“Before jumping to any conclusions and implications, we should keep the CNY (Chinese New Year) holiday distortion in mind. YoY CPI inflation was upwardly distorted in Jan (at 4.5%) and downward distorted in Feb (at 3.2%) due to the different timing of the CNY holiday. The average (at 3.9%) of Jan and Feb CPI inflation readings is the right measure of inflation in Jan-Feb. In that sense, CPI inflation actually slowed to 3.6% YoY in March from 3.9% in Jan-Feb.”
But Lu said CPI inflation could not moderate much further because of increasing price pressures. First, elevated oil prices could impact prices of domestic fuel and chemical products, the government is also likely to seize the opportunity to raise regulated utility prices like water and fuel and finally labour costs are expected to rise.
It is unlikely that China will see a massive stimulus according to Lu, the #1 China economist according to Bloomberg, because he thinks the current growth pace is appropriate for China, and a faster pace would add to inflation pressures.
Lu expects annual CPI to fall to 3.5 per cent in 2012, from 5.4 per cent in 2011. He expects PPI to fall to 1.7 per cent in 2012, from 6 per cent in 2011. Both CPI and PPI are expected to fall before rebounding in the second half of the year.