China: PPI inflation may have peaked - ING

According to Iris Pang, Economist at ING, deleveraging in the corporate sector keeps China’s PPI inflation elevated, though they think it has peaked and a high base effect will start to push in lower from November.

Key Quotes

“Contrary to our forecast of a sharp acceleration, PPI inflation in October was unchanged from September’s 6.9% rate (INGF: 7.3% YoY, consensus: 6.6%). However, consistent with our forecast, high raw material prices associated with deleveraging reforms in key sectors (coal, steel) continued the main driver of PPI inflation. We believe PPI is close to its cycle peak and we expect the high base effect to start to move the YoY inflation rate lower from November.”

“CPI inflation accelerated more than consensus to 1.9% in October from 1.6% in September (INGF: 1.5%, consensus: 1.8%). Food drives CPI and the adverse weather conditions resulting in higher vegetable prices narrowed deflation in the food component (-0.4% vs. -1.4% in September). The non-food inflation was unchanged at 2.4%.”

“There is a lack of direct transmission channel from PPI to CPI in China. Higher PPI means producers making profits but we don’t see similar wage rise to support consumer spending. And because the raw materials are mostly used in construction, it does not affect costs of consumer products directly.”