HomeContributorsFundamental AnalysisChinese Inflation Turns to Acceleration

Chinese Inflation Turns to Acceleration

China picked up the torch this morning with the publication of national inflation data. In December, the consumer price index rose from 1.6% to 1.8% y/y. Producer prices, an important leading indicator for national and global inflation, are losing 0.7% y/y, the third consecutive month of y/y decline. While consumer prices matched expectations, producer prices came in well below analysts’ average forecast of -0.1%.

In contrast to much of the world, China faces low rather than high inflationary pressures – the tail-end effect of austerity policies due to quarantines that have stifled economic activity. Some are suggesting a contraction of the economy in the first quarter, and the trend of a sharp slowdown coupled with widespread unrest was a fundamental reason for the December withdrawal of the 0-covid policy.

Overall, the opening of the economy promises to be a crucial pro-inflationary factor capable of pushing up global commodity prices. But China also buys more from Russia and Iran at a discount and is almost a monopoly buyer. At the same time, China is re-establishing coal purchases from Australia, which can also keep domestic prices down.

In the same direction, the appreciating renminbi has risen by 2.3% against the dollar since the start of the year and by 8% from its peak in November to 6.75 USDCNH, where the pair had consolidated before from May to August. On the weekly charts, the USDCNH struggles for long-term trends as the pair trades between the 50- and 200-week averages. Overcoming these levels in the last three years has triggered powerful moves. And now, similarly, it could be the starting point for a strong movement.

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