China's inflation lift indicates strong demand

Assessed in tandem with the previous day's report of a narrowing in China's international trade surplus in October, the latest update on the country's inflation indicates the central government's progress towards rebalancing the economy.

China's CPI inflation rate accelerated to 1.9% in the year to October from 1.6% in the previous month. This is higher than market expectations for a 1.8% rise and is the fastest rate of increase since January this year when consumer prices rose by 2.5%.

The acceleration in consumer prices were driven by a smaller decline in the politically-sensitive food prices (down 0.4% year-on-year in October from down 1.4% in September) and indicative of stronger household demand, the price rise of consumer goods quickened to 1.1% in the year to October (from 0.7%) while that of services remained strong, dipping only marginally to 3.2% from 3.3%.

Data on Chinese producer prices echo the narrative of continued robust growth in the economy. The producer price index (PPI) went up by 6.9% in the year to October, equalling the 6.9% rate recorded in the previous month but much higher than market expectations for a 6.6% outcome. September and October's PPI figures were the highest since the 7.6% year-on-year increase recorded in March this year and marked the 14th straight month of gains in prices at China's factory gates.

The pick-up in CPI inflation indicates that Chinese producers are able to pass on the higher costs of production onto consumers.

Indeed, reports: "On the back of strong producer prices, China's major industrial firms posted faster profit growth in the first three quarters, contributing to the 6.9% growth rate of the overall economy during the period. Industrial companies with annual revenue of more than 20 million yuan ($3 million) reported profits of 5.58 trillion yuan in the first nine months, up 22.8% from a year earlier, previous NBS data showed."

While the rising pressure on consumer and producer prices suggests that the People's Bank of China (PBOC) could switch its current neutral with a tightening bias policy into actual tightening, note that despite the rising momentum in consumer price inflation, it remains well below the targeted 3% inflation rate.

Moreover, China's efforts towards improving air quality in the country could slow production in Chinese factories that would reduce demand (and hence, prices) of raw materials. Not to mention, the expected correction in commodity prices going forward.

Read more: PPICPIPeople's Bank of ChinaNBS
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