China inflation soars to 32-month high fuelling worries of further PBoC tightening

The CPI jumped 2.5% y-y in January, its highest since May 2014, beating consensus of 2.4%, and up from December rate of 2.1%

China inflation
CPI inflation at 32-month high in China in January. Reuters

Consumer price inflation in China accelerated much more than expected in the first month of the year increasing concerns of further rate hikes by the central bank.

The year-on-year rate jumped to 2.5% for January, its highest since May 2014, It compares to the December rate of 2.1% and the market consensus of 2.4%.

Month-on-month, prices rose 1% in the world's second largest economy, Statistics China said on Tuesday (Feb 14). from the December figure of 0.2% and beating market expectations of 0.7%.

Details showed that the acceleration was broad-based. Food price inflation, the most politically sensitive component, rose to 2.7% from the December rate of 2.4% while non-food inflation accelerated to 2.5% from 2%.

Cost of consumer goods jumped 2.2% after rising 1.8% in the prior month and services costs gained 3.2% from 2.5% of December.

Another data point showed the producer price index jumped 6.9% in January, faster than the December rise of 5.5% exceeding the consensus forecast of 6.3%.

China factory gate inflation

The jump in the PPI index in January was its fifth straight rise and has taken the factory gate inflation to its fastest since August 2011.

Most of the sub-categories were up with production up 9.1% from 7.2% in December as extraction gained 31.0%, raw material 12.9% and processing up by 5.9%. Consumer goods rose 0.8% from 0.8%.

However, prices of consumer durable declined by 0.6% compared to the December decline of 0.8%.

PBoC Tightening Bias

China surprised global markets on Feb 3 with a hike in short term money market rates as analysts said the central bank policy amid property market overheating contains a strong message.

The PBOC (People's Bank of China) raised the 7-day, 14-day and 28-day reverse repurchase agreements (reverse repo rates) by 10 basis points each to 2.35%, 2.5% and 2.65% respectively.

It was in the previous week, the apex bank raised the medium-term rates.

It is the first increase since 2013 for the two shorter tenors, and the first move since 2015 for the 28-day contracts.

Some analysts pointed out that the 7-day reverse repo rate is the unofficial policy rate although the PBoC doesn't like to explicitly say that.