Current headline inflation levels are the highest since 2013 and 2016. We see some parallels in these three periods. This time around, food inflation is also pushed up by meat, vegetables and fruits.
Concerns of insufficient food supplies have risen recently. Pork prices rose as pigs were culled to contain the outbreak of swine fever. Meanwhile, weather disruptions have pushed up the price of fruits and vegetables.
We still believe that headline inflation is not a huge concern at the moment. Core inflation (excluding food and energy) has been lower than levels seen in 2017, below 2% y/y. There has been little pressure from healthcare, transport/communications, residence and clothing.
The biggest risk stems from the reduced allowance authorities have on inflation, particularly if U.S. tariffs start to make an impact. If producers and exporters from other countries pass on higher costs to Chinese consumers, it will increase inflation risks. At the same time, authorities will fear imported inflation if the renminbi weakens more significantly.
For now, we view that overall inflation should remain below the government’s target of 3% in 2019 and 2020. Our forecast is for inflation at 2.3% in 2019 and 2.4% in 2020. At the same time, official support of a stable currency should maintain USDCNY at 6.90 end-2019 and 6.80 end-2020.
Should inflation rise to above-3% levels, we see risks that the PBOC will shift its stance from supporting growth to addressing inflation.
Figure 1: Headline, Food and Core Inflation (% y/y)
Source: Bloomberg, Continuum Economics