China’s inflation slowed to 3.2% in February 2012

China’s consumer prices inflation slowed after the slight pickup in January due to the Chinese New Year. The headline inflation fell from 4.5% yoy in January to 3.2% yoy in January, below market consensus of 3.5%. The headline inflation on a month-on-month basis turned to negative 0.1%.

While food prices are still the category which showed biggest rise in prices, contributing 1.99 ppt of the headline inflation, food prices inflation has slowed from 10.5% in January to 6.2% in February, and fell 0.3% on a month-on-month basis. Prices in other categories appeared stable, ranging from 0.4% (recreation, education and culture articles) to 3.8% (household facilities, articles and services).

Meanwhile, the producer price index (PPI) remained stable, with the headline figure showing no change on a year-on-year basis (compared with 0.1% yoy rise of the consensus).

Source: National Bureau of Statistics

Just as the market has expected, inflation peaked in the summer of last year after increasingly tight monetary condition. At the same time, we are also seeing home prices getting progressively weaker, showing the impact of monetary tightening.

The view here as explained in the 2012 and beyond forecast makes it clear that because of over-investment and potential bad debts, there is a good possibility that inflationary pressure will fade in the years to come, or indeed we could see deflation (as opposed to my view early last year that inflation could have gone totally out of control). While there will certainly be short-term fluctuations on inflation, I suspect that we are already on track to see further disinflation. Meanwhile, a lower-than-expected inflation print will be interpreted by the market as a signal that the Chinese government and People’s Bank of China can now be more aggressive to ease policy and stimulate growth in the short-term.

As a reminder, the inflation target for 2012 is 4% overall.

Read: China Economy: 2012 and beyond

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.