China inflation: rise in demand due to eased Covid-19 curbs forecast to drive up consumer prices
- China’s consumer price index rose by 2.5 per cent in June from a year earlier, up from a rise of 2.1 per cent in May
- The producer price index, which reflects the prices that factories charge wholesalers for products, grew by 6.1 per cent in June, but dropped from a rise of 6.4 per cent in May
Increased demand due to the easing of coronavirus restrictions could contribute to a rise in China’s consumer inflation later this year, analysts said, even after prices remained stable last month.
This was above expectations, with CPI having been expected to increase by 2.4 per cent last month, according to Chinese financial data provider Wind.
While China is on a recovery path, as the economy unlocks amid accommodative policies, there are still downside risks from renewed lockdowns and another recession as long as Beijing sticks to its zero -Covid strategy, according to a Nomura report.
We expect CPI inflation to keep rising in the second half, as the domestic economy recovers from the lockdown in the first, and the pork price cycle turns inflationary after a long period of deflation
Across all economies, the report added, high inflation is expected to persist as the world “enters a stagflationary environment”.
China has set a consumer inflation target of “around 3 per cent” for the year.
Zhang Zhiwei, chief economist at Pinpoint Asset Management, expects CPI inflation to rise above 3 per cent in the second half.
“CPI continued to trend up in June and rose to the highest level in two years,” he pointed out. “We expect CPI inflation to keep rising in the second half, as the domestic economy recovers from the lockdown in the first, and the pork price cycle turns inflationary after a long period of deflation.”
“Economic growth is still very weak. The government is likely to tolerate inflation and focus on boosting growth. We expect the monetary policy stance to stay accommodative.”
Food prices in China increased by 2.9 per cent from a year earlier in June, compared to 2.3 per cent in May, while non-food prices grew by 2.5 per cent last month, year on year, which also went up from a reading of 2.1 per cent growth in May.
The curbs should reduce the immediate likelihood of another massive nationwide wave of cases, she added, but substantial uncertainty will remain in the second half of the year due to the threat of more transmissible coronavirus variants and subvariants.
The producer price index (PPI), which reflects the prices that factories charge wholesalers for products, went up 6.1 per cent in June year-on-year, but dropped from 6.4 per cent in May.
This was above expectations, with PPI having been expected to increase by 6 per cent last month, according to Wind.
“China’s economy has been battered by its zero-Covid policy and floods in some regions, which have affected manufacturing output,” said Puja Tiwari, economic research analyst at London-based consulting firm GlobalData.
China has set a target of “around 5.5 per cent” economic growth this year but many expect it to fall short, with GlobalData predicting 4.1 per cent growth in 2022.
China’s core consumer inflation rate, excluding the volatile prices of food and energy, rose by 1 per cent in June compared with a year earlier, up 0.1 percentage point from a rise of 0.9 per cent in May.
