China’s consumer price inflation quickened to 2.5% year-on-year in December, slightly above expectations of 2.3%, mainly due to a rise in food prices.
The data showed that food prices, estimated to make up about 30% of the consumer price index, rose by 4.2%, while non-food prices increased by just 1.7%.
“The coldest winter in 28 years was one key factor; and it has continued to push up food prices into the New Year,” Societe Generale’s China analyst Wei Yao said.
She noted that month-on-month, inflation jumped to 0.8% in December from the previous month’s 0.1%, “more than what usual seasonal pattern would explain.”
“Most of the gain was due to strong food inflation during the month, which ran at the fastest pace in 11 months of 2.4% month-on-month,” Yao added.
On Thursday, data showed that Chinese exports jumped in December, with some analysts saying this points to a stronger recovery.
The higher than forecast inflation figures could confirm that view, but they also dampen hopes of further monetary stimulus, which is why investors rushed to take profits in the stock market. Some analysts even believe the People’s Bank of China (PBOC) might tighten monetary policy.
The latest inflation figure means that “our opinion that the next interest rate move will be a hike, implemented in the second half year 2013, is confirmed,” analysts from Raiffeisen Bank wrote in a market note. But Yao does not believe the PBOC’s measures will be so drastic for the time being. She points out that the recovery in producer prices continued to lag behind, with PPI in December below expectations for the ninth time in a row.
Commodity inflation remains limited and restocking has started in several sectors but it remains slower than its traditional pattern, Yao added.
“There is little sign of severe inflationary pressure at this stage,” she said.
“Hence, the People’s Bank of China is likely to shift its focus towards inflation and financial risk from growth, albeit gradually and carefully. In that case, the most likely policy action will be moderately tighter liquidity conditions and lower monetary targets.”