Divergent in China’s CPI & PPI trends

China Inflation data came without major surprises. Consumer price growth slowed to 1% y/y while producer prices returned to a peak of 9% y/y, the highest since 2008.

The bottom of the low base was in May 2020, which seriously complicates the economy’s balancing act. The People’s Bank of China has based its policy on producer price developments and data requires to tighten the liquidity further.

But this is not easy to do with weak and continuing withering consumer inflation and against the background of a loss of momentum in the economy. The choice between a soft policy that boosts prices and a hard one that suppresses economic growth is a choice between two evils and one that China has not had to make before, as prices tend to go hand in hand.

China’s inflation trends may foreshadow those for the USA, where CPI and PPI data are published later this week. Similarly, there could be a reversal to slower consumer inflation and a further acceleration in producer prices.

The FxPro Analyst Team