Thought June 12, 2019 / 04:40 am UTC

China: Rising Food Inflation Poses Risks

By Jeff Ng

Although we think that headline inflation remains manageable for now, rising food inflation is posing risks to China’s overall inflation outlook. If food inflation does not fade in the coming months, rising consumer costs from potential tariffs may threaten China’s inflation outlook and the People's Bank of China's (PBoC) stance. 

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

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Analyst Certification
I, Jeff Ng, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.