5 Charts on Chinese Inflation Trends
The August inflation numbers for China have just been released, so it's a good opportunity to dust off a number of the Chinese inflation charts. The headline stats: CPI inflation was 1.8% y/y (1.7% expected, 1.4% previous) and PPI inflation was 6.3% (5.7% expected, 5.5% previous). Basically China's August inflation numbers surprised to the upside, and as I'll outline with the graphs below, it's part of a gradual uptrend in inflation, and it may have wider and more meaningful implications than you might expect...
1. Inflation on the rise in China? China had what looked like a false start to a new inflationary era in 2016 with base effects (food related) sinking headline CPI inflation to a low of 0.8% in Feb - now at 1.8% in August. But looking at some of the core measures e.g. ex food and ex food & energy, there is a clear if gradual uptrend in consumer price inflation in China.
2. China - it's all about property: As we have extensively outlined previously - and a key factor informing our call last year for the surge in PPI which surprised most - is the point that property prices typically tend to have a profound impact across China's economy. This is why our view is to get China's economy you must first get what's going on in property. It's also worth noting, that China tends to run a tightening bias in its overall monetary policy settings when you see rising property, producer, and consumer price inflation, so be on watch for that - it could be a fresh dynamic that not many are expecting.
3. The core of the matter - not just commodities? The chart below first appeared in the Weekly Macro Themes report as we looked at the surge in PPI - noting that obviously a big driver of PPI is commodities, but there has also been an observable pickup in producer price inflation for "general manufacturing" - that is, our composite of a selection of industries which are relatively less sensitive to commodities. Adding in non-food CPI you get a view of core inflation pressures, and there are some.
4. The surprising truth about Chinese inflation: The chart here shows the big surprise that it was to markets of the initial surge in PPI, and once again the (re)surge is taking punters by surprise. Astute observers will recall that inflation began surprising in China and swiftly also started to surprise to the upside in various other countries and regions.. in other words, one implication of a resurgence in inflation in China will be a generalized global resurgence in inflation - as I said before, don't count out "reflation" just yet.
5. One "So-What?" of higher Chinese PPI: High and rising Chinese producer price inflation has generally been positive for emerging market equity performance as the chart below shows. There's a couple of reasons for this, e.g. it typically happens as a result of a combination of higher commodity prices (good for commodity producing EM), stronger China in general (China is a big part of EM and driver of demand for other EM), also would typically reflect favorable currency backdrop for EM (sort of a financial conditions argument, or lack of financial stress for those EM vulnerable to FX). So should the latest resurgence in Chinese PPI persist it would reinforce the strength seen in emerging market equities.
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