China Inflation under Control
Bottom Line: January China CPI rose to 2.1% Yr/Yr and remains consistent with easy PBOC policy. Reopening is unlikely to produce major inflation pressures, as excess savings are less than in DM economies when they reopened and global supply chain problems have eased. We see 2.1% CPI inflation for 2023 and 2.5% for 2024.
Figure 1: China CPI and PPI (change over year ago %)
Source: Continuum Economics
China Inflation Ticks Up, But
The January China CPI inflation at 2.1% came in line with expectations and rose from the 1.8% figure seen in December. The breakdown of the data shows that core inflation rotated higher also to 1.0% Yr/Yr, but this is nothing to be worried about.
The prospects remain that CPI inflation will move marginally higher through 2023 and we forecast 2.1% for 2023 as a whole (here). Risks are skewed to the upside, as pent up demand boosts consumer services and could see supply reacting slower than demand in certain sectors and this could boost inflation on a temporary basis. However, China did not have a reopening surge in inflation in H2 2020 after the 1st wave (Figure 1), while excess savings are less than DM economies when they reopened. Additionally, China timing is helped by the easing of global supply chain problems through the course of 2022. One issue to watch is labor market developments. Some slack exists, but to control wage inflation China authorities will have to restart rural to urban migration to avoid urban labor markets becoming too tight into 2024.
Commodity prices are also an issue to watch for. Oil prices have been volatile in recent months and we see an upward trend in WTI oil prices to $100 by end 2023 (here), both on China oil demand recovering through 2023 and tight supply conditions. Even so, China has been buying a larger proportion of oil from Russia at a substantive discount to WTI, which will lessen the blow. China has also refocused power generation more towards coal and reduced expensive gas imports. PPI Yr/Yr trends suggest that no major global inflation force is likely to feedthrough in the coming months (Figure 1), while the Yuan has also partially rebounded after the 2022 decline.
This will leave the PBOC willing to maintain the current easy monetary policy through H1 2023. This probably does not mean any further reduction in policy rates, given that the authorities will want to see how the reopening is impacting the economy. By H2 2023, economic data should confirm that growth will likely exceed 5% in 2023 and is set for reasonable momentum in 2024. This should prompt the PBOC to start slow normalization of interest rates and we see a 10bps increase by end 2023 in the 7 day reverse repo rate.