Pantheon with the note. Makes sense to me.
- China: PPI fell 0.7% y/y in December, after -1.3% in November. Consensus was -0.1%.
- CPI rose 1.8% y/y in December, after 1.6% in November. Consensus was 1.8%.
Producer price deflation moderated 0.6pts to -0.7% y/y in December, despite massive Covid waves slamming through the country and disrupting production and logistics. Demand and supply of producer goods likely fell in December, in view of the steep falls in the official manufacturing PMI production and new orders indexes. The remarkable thing is that few shortages have been reported. The PMIs indicate more limited supply-chain disruptions during the Covid exit waves, so far, than during the Q2 2022 lockdown period.
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Price falls turned to rises year-over-year for mining and raw materials in December, and the pace of decline slowed for producer goods. By contrast, the manufacturing price index fell 2.7% y/y in December, barely slowing from the previous two months. We think this is partly owing to new production capacity coming on line, as a result of previous fixed asset investment, though this has slowed a bit since the current Covid exit waves start in November.
Prices in the iron and steel sector have stabilised over H2 2022, supported by construction demand, stemming from infrastructure and manufacturing investment. Iron ore prices month-to-month in December for the first time since May, while iron and steel processing prices were flat. Elsewhere, oil and gas extraction prices are rising at a lesser rate, 14.4% y/y in December, down from the peak of 54.4% in June, in tandem with easing international prices.
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Consumer price inflation ticked up 0.2pts to 1.8% y/y in December, driven by food prices, whose CPI contribution increased 0.2pp to 1.1pt in December. CPI inflation excluding food was unchanged at 1.1% in December. Service prices are almost flat, up 0.2% y/y in December, despite the likely plunge in retail sales. Statistics officials probably couldn’t collect price data from the vast swathes of food vendors, restaurants and cafes that had to shut down temporarily during the exit waves.
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Within food prices, pork prices have been the main inflationary driver owing to the pork price cycle, which tends to follow its own timing. Pork prices rose 22.2% y/y in December, down from a peak of 51.8% in October. They actually fell 10.5% m/m seasonally adjusted, after four months of price increases. The pork industry has increased breeding sow stock in response to sky-high prices, which, in turn, stem from a supply shortage owing to a swine fever outbreak in 2018/19.
Nothing in the inflation data is likely to worry the PBoC or tie its hands when it comes to monetary policy. Both producer and consumer prices have been relatively stable given the turbulent economic situation, and supply chain issues appear more limited than during the wrenching Q2 2022 lockdown.
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We think China will cut the one-year and five-year LPRs to boost private sector demand, as China enters a reopening phase starting as early as March and in Q2 onwards. Domestic demand is likely to pick up, led by consumption and private investment. The rebound in domestic demand is unlikely to be strong enough to generate significant inflationary pressure, considering the gloomy outlook for exports and that the property sector recovery will be gradual and regionally uneven.
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Another restraint on inflation is the industrial capacity increase that should result from rapid manufacturing fixed asset investment growth, averaging almost 14% y/y, since November 2020. Large investments have gone into general and special equipment manufacturing, power equipment including renewables, electronics, electric vehicles and batteries. We think that this industrial capacity increase means that China will export disinflation to the world this year, despite domestic demand expansion.
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