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Consumer price growth to quicken, rate hikes likely
By Li Wei, Stephen Green and Shen Lan |
March 14, 2013, Thursday
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Print Edition
Print Edition
OUR long-held view is that inflationary pressure in China will rise through 2013. We forecast average consumer price inflation at 4 percent this year. This is a non-consensus call; the market expects about 3 percent. Interestingly, the official new consumer price index inflation target set earlier this month is 3.5 percent, right between our forecast and consensus. We interpret the cut in the target from 4 percent last year to suggest that the leadership now has slightly less tolerance for inflation.
The CPI data for January-February is consistent with our view. Inflation accelerated to 3.2 percent year-on-year in February from 2.0 percent in January, faster than the market had expected.
While the February figure was distorted by Lunar New Year effects, the fact that CPI inflation averaged 2.6 percent year on year for the first two months of the year, 0.5 percentage point higher than the average in the fourth quarter of 2012, suggests that underlying inflation pressure is building. Also, the month-on-month, seasonally adjusted annualized rate of CPI inflation rose to 3.7 percent in January-February from 3 percent in the fourth quarter of 2012.
Food remains the dominant driver of CPI inflation. The food-price index rose 6.0 percent year on year in February, versus 2.9 percent in January. The non-food index was up 1.9 percent year on year in February, compared with 1.6 percent prior.
Food inflation is set to rise further in 2013, we believe. Indeed, pork - the biggest driver of inflation over the past decade - has not even begun to add to overall inflation yet. Pork prices fell 1.0 percent year on year in February, trimming 0.1 percentage point from overall food inflation on a weighted basis. This effect will reverse from March, even if pork prices stay flat. This is because pork prices fell 16 percent from March to August 2012, and the low base effect will soon kick in.
We believe pork prices will rise in 2013. We estimate that pork prices will rise 16 percent in 2013 after falling 3.5 percent in 2012. Given that pork has a 2.9 percent weighting in the CPI basket, this would add 0.45 percentage point to headline inflation this year, after subtracting 0.1 percentage point last year.
In the non-food area, residential and services-sector prices play key roles. In February, residential prices rose 2.8 percent year on year, similar to the increase in January. Residential prices within the CPI include building and decoration materials, public and private housing rents, water, electricity and gas. Services-sector inflation jumped to 3.1 percent year on year in February and averaged 2.7 percent in January-February - up from 2.4 percent in the fourth quarter of 2012. Growth in services held up throughout 2012, as reflected in non-manufacturing PMI data. This, combined with slower growth in the labour market, generates upward price pressure.
Our leading indicator for CPI suggests that CPI inflation will continue to trend higher throughout the first half of 2013 and is likely to break above 5 percent by the fourth quarter of 2013. From a policy perspective, we believe this issue will have become cause for concern by mid-year. We think the central bank will hike benchmark interest rates once in late fourth quarter by 25 basis points, followed by four more hikes in 2014.
Li Wei, Stephen Green and Shen Lan are economists with Standard Chartered Bank. The opinions expressed are their own.
The CPI data for January-February is consistent with our view. Inflation accelerated to 3.2 percent year-on-year in February from 2.0 percent in January, faster than the market had expected.
While the February figure was distorted by Lunar New Year effects, the fact that CPI inflation averaged 2.6 percent year on year for the first two months of the year, 0.5 percentage point higher than the average in the fourth quarter of 2012, suggests that underlying inflation pressure is building. Also, the month-on-month, seasonally adjusted annualized rate of CPI inflation rose to 3.7 percent in January-February from 3 percent in the fourth quarter of 2012.
Food remains the dominant driver of CPI inflation. The food-price index rose 6.0 percent year on year in February, versus 2.9 percent in January. The non-food index was up 1.9 percent year on year in February, compared with 1.6 percent prior.
Food inflation is set to rise further in 2013, we believe. Indeed, pork - the biggest driver of inflation over the past decade - has not even begun to add to overall inflation yet. Pork prices fell 1.0 percent year on year in February, trimming 0.1 percentage point from overall food inflation on a weighted basis. This effect will reverse from March, even if pork prices stay flat. This is because pork prices fell 16 percent from March to August 2012, and the low base effect will soon kick in.
We believe pork prices will rise in 2013. We estimate that pork prices will rise 16 percent in 2013 after falling 3.5 percent in 2012. Given that pork has a 2.9 percent weighting in the CPI basket, this would add 0.45 percentage point to headline inflation this year, after subtracting 0.1 percentage point last year.
In the non-food area, residential and services-sector prices play key roles. In February, residential prices rose 2.8 percent year on year, similar to the increase in January. Residential prices within the CPI include building and decoration materials, public and private housing rents, water, electricity and gas. Services-sector inflation jumped to 3.1 percent year on year in February and averaged 2.7 percent in January-February - up from 2.4 percent in the fourth quarter of 2012. Growth in services held up throughout 2012, as reflected in non-manufacturing PMI data. This, combined with slower growth in the labour market, generates upward price pressure.
Our leading indicator for CPI suggests that CPI inflation will continue to trend higher throughout the first half of 2013 and is likely to break above 5 percent by the fourth quarter of 2013. From a policy perspective, we believe this issue will have become cause for concern by mid-year. We think the central bank will hike benchmark interest rates once in late fourth quarter by 25 basis points, followed by four more hikes in 2014.
Li Wei, Stephen Green and Shen Lan are economists with Standard Chartered Bank. The opinions expressed are their own.
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