China: Lunar New Year Boosts CPI, But Disinflation Still In Place
Bottom Line: February China CPI surged to +0.7% v -0.8% Yr/Yr due to three factors. The late lunar New Year boosted CPI seasonally, while the good lunar New Year also boosted pork/food prices and travel prices. The bounce is unlikely to be sustained and we see a fall back to 0.3-0.4% Yr/Yr in March. It remains a close call whether a 10bps cut in the medium-term facility lending rate (MLF) occurs March 15.
Figure 1: CPI and PPI (Yr/Yr %)
Source: Datastream/Continuum Economics
The breakdown of the CPI data provides some context on the headline CPI rebound. Food prices were -0.9% Yr/Yr versus -5.9% in January, with pork prices up 7.2% on the month. Meanwhile, the tourism subcategory surged to 23% Yr/Yr. In both cases a good lunar New Year holiday period was the main driver, with travel numbers back to pre COVID levels. Additionally, the timing of lunar new year in February boosted the CPI seasonally, as the holiday has been in January last year. Core CPI also surged from 0.4% Yr/Yr to 1.2%.
However, the momentum from February is unlikely to be repeated and some of the CPI categories will likely go into reverse in March and we look for a +0.4% Yr/Yr. The lunar New Year was a special period and households will face all the uncertainties around the housing market and employment – consumer confidence remains weak. Also PPI fell 2.7% Yr/Yr v -2.5% in January, as excess production continues to be a disinflationary force. Still the February bounce means a better profile for CPI and we revise 2024 from +0.2% to +0.5%.
The odds of a 10bps cut on March 15 from the PBOC are 50/50. Though CPI headline bounced, the authorities will know that temporary factors boosted CPI and the headline rate will likely come back down into the spring. Meanwhile, the authorities remain keen to support the 5% growth target for 2024 through targeted easing. With the gap between the 5yr LPR rate and 1yr LPR now narrow, after the recent 25bps cut in the 5yr LPR, a March 10bps MLF cut would be likely. However, the authorities have been cautious on the Yuan and that why the call from Friday is 50/50.