China: PPI and CPI inflation diverge further in May – Nomura

China’s producer price index (PPI) inflation continued to rise in May while CPI inflation remained unchanged from April, notes the research team at Nomura.

Key Quotes

“We maintain our forecast in which PPI inflation rebounds in Q2 on base effects before resuming its longer-term moderation in H2 due to weak domestic demand. That said, high oil prices, if they sustain or rise even further, pose an upside risk to our forecast of a measured moderation in PPI inflation in 2018. The simple regression between Brent oil price and China’s PPI inflation suggests that 1pp change of oil prices causes 0.1pp change in PPI inflation.”

“The subdued Consumer price index (CPI) inflation print was mainly due to falling food prices, but with the hog-to-corn price ratio falling below the breakeven threshold of six since March (which implies a potential shortage of pork supply in the future as hog raising becomes unprofitable), food prices may rise in coming quarters. We maintain our call for a mild pickup in CPI inflation in 2018, mainly driven by the potential for higher food prices, high services prices and the pass-through of high producer and property prices. Inflation does not appear to be a big concern this year, which leaves room for policy easing. We expect one more 100bp reserve requirement ratio cut this year, as early as in July.”