CPI up 2.5%, highest since February

China’s consumer inflation rose at a faster pace in September to extend the streak to four straight months, but experts believe inflation will remain in a benign range.

The Consumer Price Index, a main gauge of inflation, climbed 2.5 percent from a year earlier in September, faster than 2.3 percent in August, 2.1 percent in July, 1.9 percent in June and 1.8 percent in both May and April, the National Bureau of Statistics revealed yesterday.

The September figure was the highest since February this year, when the CPI peaked at 2.9 percent year on year, mainly driven by the Spring Festival holiday.

The acceleration was driven by a fast increase in non-food prices, which rose 2.2 percent year on year, contributing to a 1.78-percentage-point growth in the overall CPI increase.

Food prices jumped 3.6 percent year on year in September, marking their strongest rise since 2017, aside from the Lunar New Year holiday period this year. The pace of increase was also considerably faster than the 1.7 percent recorded in August.

The prices of vegetables and fruits surged 9.8 percent and 6.4 percent year on year respectively. Together they contributed 0.35 percentage points to the CPI on a year-on-year basis.

The price spike was mainly on account of inclement weather conditions. Some vegetable-producing regions such as Shandong Province had to deal with storms, according to the Australia and New Zealand Banking Group.

Pork prices declined by a smaller magnitude of 2.0 percent year on year in September, compared with declines of 4.9 percent in August and 6.8 percent in July. 

“We expect local food prices to hold up, particularly as pork prices have been recovering despite the swine fever outbreak since July,” said David Qu, markets economist at ANZ Group.

“The higher tariffs on US soybeans should also exert an upward pressure on pork prices.” 

Non-food prices also posted an increase by 2.2 percent year on year, contributing to a 1.78-percentage-point increase in the overall CPI growth.

On a month-on-month basis, the CPI increased 0.7 percent in September, the same pace as the previous month, with food prices rising 2.4 percent from August.

Vegetable and pork price inflation added 0.25 percentage points and 0.06 percentage points month on month, respectively, to the headline number.

Prices for medical products and services rose 2.7 percent year on year, transport and communications prices gained 2.8 percent, while educational, cultural and entertainment prices rose 2.2 percent.

Prices for dwelling-related expenses, including rent and utilities, rose 2.6 percent year on year.

Sheng Guoqing, the bureau’s senior statistician, said vegetable prices surged due to extreme weather conditions, including typhoons and heavy rains, in some regions. 

The rising demand for pork and eggs for the Mid-Autumn Festival and National Day holidays also caused price hikes, Sheng said.

The Producer Price Index, which measures costs of goods at the factory gate, rose 3.6 percent year on year in September, slowing from the 4.1 percent increase in August.

“The slowdown was largely due to a high base last year (PPI inflation was 0.6 percent month on month compared to 1 percent month on month in September 2017) as well as continued weakness in domestic demand,” said Lu Ting, chief China economist of Nomura.

Global crude oil prices have now become the major factor driving China’s PPI. The price index of oil and natural gas rose to 41.2 percent year on year from 39.6 percent in August. 

However, PPI inflation in upstream sectors moderated broadly. The figure fell to 11.7 percent and 7.3 percent year on year in September in mining and the raw material sector, respectively, from 12.1 percent and 7.8 percent in August.

The softening PPI inflation in non-metallic mineral products manufacturing, ferrous metal processing, chemical products manufacturing, and coal mining subtracted around 0.32 percentage points from the year-on-year headline PPI inflation number, thus more than offsetting spikes in oil and natural gas extraction and fuel processing industries inflation.

“Overall, inflation is still within a supportive range and we think it is not yet a major factor for policy decisions,” ANZ Group said.

The People’s Bank of China Governor Yi Gang recently said that he believes inflation will remain in a benign range and that the CPI inflation is likely to be slightly above 2 percent this year. 

“That said, we expect CPI inflation to moderate over the next couple of months as vegetable prices normalize,” Nomura’s Lu said. 

“We maintain our call for a mild rise in CPI inflation to 2.1 percent in 2018 from 1.6 percent in 2017.”

Nomura believes that investors should keep an eye on developments around the African swine fever, but that the risks to headline inflation from other factors — floods in Shouguang City in Shandong Province, yuan depreciation and escalating China-US trade tensions — are overdone.

China reported its first case of African swine fever in August in Liaoning Province. Later outbreaks were reported in several other provincial regions.