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China March CPI: Edging up Temporarily

04-09 15:20 Caijing
Get ready for more easing steps into 2Q2012. We expect at least another two RRR cuts (each 50bp) in 1H 2012.

March CPI rose to 3.6%yoy on food, roughly in line with our and consensus forecasts. The rise was almost all caused by a rebound in food prices, especially fresh vegetable which we see as temporary. Given fast drop in PPI and slowing aggregate demand, we expect headline CPI to moderate in the coming months. So growth remains the top priority for Beijing‘s policy makers. We expect at least another 100bp RRR cuts in 1H2012.

Facts
March headline CPI rebounded to 3.6%y-o-y, up from February's 3.2%y-o-y, a touch higher than our (3.5%) and market expectations (3.4%). The acceleration in headline CPI was mainly driven by food prices, which rebounded to 7.5%y-o-y in March from 6.2%y-o-y in February (adding 2.39 pct to headline CPI vs. subtraction of 1.3pct in Feb.). On sequential basis, food prices increased by 0.2%m-o-m in March, reversed the 0.3%m-o-m decline in February (non seasonally adjusted) and its historical pattern of a decline at around 1% in the past fiver years. The seasonally adjusted m-o-m growth surged 0.5% in March vs. 0.3% during January to February. 

By products, fresh vegetable prices surged 20.5%y-o-y in March vs up 6.5%y-o-y in February and hence contributed 0.64pct to headline CPI vs. 0.2pct a month earlier, the biggest driver of March’s CPI rebound. Separately, price growth in aquatic products accelerated to 11.4%y-o-y in March (vs. 7.5%y-o-y in Feb.), contributing 0.27pct to headline CPI (vs. 0.18pct in Feb.). However, price decreases in fruits and eggs, down 6.2%y-o-y and 5.8%y-o-y, respectively, partly offset the spikes in vegetable and other food product prices.

Meanwhile, non-food inflation edged up to 1.8%y-o-y in March, from a 16-month low of 1.7% y-o-y in February. Sequential growth of non-food CPI increased by 0.2%m-o-m (non-seasonally adjusted) in March, compared with 0% m-o-m in February. Increases in motor fuels and utilities prices were behind the marginal rebound in non-food CPI in March.  

Producer’s Price Index (PPI) dropped to a 28-month low of -0.3%y-o-y in March, down from 0% y-o-y in February, in line with our and market expectations. In the details, PPI growth for producer goods fell by 0.8%y-o-y in March, compared with -0.5% y-o-y in February; meanwhile, PPI growth for consumer goods accelerated to 1.4%y-o-y in March, reversing the -1.7% y-o-y in February.

Implications
With headline CPI remains below Beijing’s annual target of 4%, the rebound in March headline CPI, which mainly led by spike in food prices, is still moderate and manageable. Supply shock due to extreme weather conditions in specific food products such as spring onion and cabbage (prices up 50%y-o-y) could be one-off as we already saw decreases in prices running into April. Vegetable prices are on track for a decline as seasonal supply increases. That said, the first negative reading of PPI data since November-2009 reminds us that the inflation is still on track to ease further, and therefore is unlikely to become the major policy concern in the near term.

Ongoing sovereign debt crisis in Europe and uncertainty in the US recovery could continue to weigh on external demand of China’s exports. In addition, domestic growth is still below trend, as indicated by a drop in HSBC manufacturing PMI (please refer to So, what to believe?, published on April 1st.). A negative output gap confirmed our view that inflationary pressure remains well-contained. Headline inflation is likely to slow further heading to the middle of the year, though at a slower than expected pace. The NDRC raised gasoline and diesel prices to record high levels on March 20th to track changes in global crude oil price increases, but it is expected that the government would slow down fuel price hikes and curb the increases in fuel prices even if crude oil prices continue to surge, thus holding the risk of a potential shock on inflation from oil price surges. Nonetheless, liberalization in utilities prices such as electricity, water and natural gas could lend more upper pressure on household living costs. However, the overall impact will be moderate and at controllable levels. The government has already factored in these aspects in its 4% CPI annual target.

Bottom line: Growth, instead of inflation is still the main economic concern for Beijing policy makers. Get ready for more easing steps into 2Q2012. We expect at least another two RRR cuts (each 50bp) in 1H 2012.

Chart 1 Rebound in March headline CPI was mainly led by food prices



Xiaoping Ma, China Economist
Hongbin Qu, Chief Economist, Greater China

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