QnD : Chinese Inflation

Quick and Dirty - Chinese Disinflation in full swing : Data released by the National Bureau of Statistics of China shows declining Consumer Price Inflation (CPI), with some new lows in subcategories, suggesting a disinflationary trend in force.

DATA : Table below shows % year on year (%yoy) change in various indices and sub indices.

OIL IMPACT AND ITEMS IN DEFLATION

Headline was dragged lower by the big drop in inflation of the Transport and Communications component, which has a ~11% weight in the CPI basket. This follows the drop in oil prices (left below). This will mean revert in 1 years' time, taking headline rate higher. Clothing, Residence (i.e. housing) and Transport/Communications, comprising 43% of the basket, are now in deflation.

FOOD INFLATION

Food has a high weighting in the basket, and the recent spike has dragged headline inflation higher. Food inflation "mean reverts" (see 2008 and 2011) and has recently spiked. so the ensuing decline should lower headline in the forthcoming months.

CORE DISINFLATING

Core CPI (ex Food and Energy) and Core CPI (ex Food Trans/Comm) registered very low levels of 1.1% and 0.3% respectively. For the former (red below), that's the low of the 2010-2020 range, whilst for the latter (pink below), the reading is the lowest since November 2009.

CHOICE vs BURDEN

Choice Inflation (consumer discretionary items) declined to 1.1%yoy in April, the lowest level since May11.

The decline in Food inflation brought down Burden inflation to 4.3%yoy. However, this is still a relatively high level which has a negative impact on disposable income as this reflects inflation on items that a consumer has to purchase (i.e. non discretionary items), e.g. Food, Housing, Healthcare, Education).

CONCLUSION : Headline inflation remains elevated due to high food price inflation which has, however, peaked and will be a tailwind to lowering headline inflation in the months ahead. Oil should not impact headline for many months.

More importantly core inflation is declining, reaching new low levels which is a reflection of declining Choice inflation which is normally an expression of weak consumption or/and excess supply of non discretionary items. The decline in Burden inflation will be welcome by Chinese householders.

All in all, Chinese CPI is showing quite clearly that the Covid19 impact on Chinese inflation is disinflationary, something that should also be the case across Developed Market Economies (and which is priced into inflation rate markets).