China CPI slows more than expected in November, re-acceleration seen

Consumer price inflation in Asia's largest economy slowed more than expected last month, weighed down by falls in food prices, but economists expected it would recover in 2018.

Indeed, some believed markets were underestimating that risk.

At the weekend, China's National Bureau of Statistics reported that the rate of advance in consumer price slipped from 1.9% in October to 1.7% for November (consensus: 1.8%).

According to Freya Beamish at Pantheon Macroeconomics, the food component probably subtracted roughly 0.4 percentage points from the headline rate of CPI, slightly more than in October.

Beamish attributed that in part to the stronger currency, the yuan, adding that reduced import price tariffs from December were likely to cap food prices in coming months.

"CPI inflation could fall further on statistical technicalities in coming months, while import tariff cuts also will exert downward pressure. But the CPI should edge back up again next year as food prices normalise," she said.

At the factory gate level on the other hand, inflation was in-line with economists' forecasts, at 5.8% on the year in November, down from a 6.9% clip observed in October.

However, Beamish expected that stability to be relatively short-lived.

"The commodity price burst is working its way through the system, but Q1 of this year will be a high base, so PPI inflation should continue to head down sharply early next year."

Yet in a research note sent to clients on Monday, economists at Deutsche Bank forecast a re-acceleration in China's CPI to a 2.7% year-on-year pace in 2018.

"More recently, food prices appears to have stabilized. Pork price, for example, bottomed out in mid-2017. The base effect from food prices will contribute to higher yoy inflation in early 2018. Our baseline forecast is that CPI inflation could reach 3% around the Chinese New Year, then edge down in the rest of the year. If food prices increase further in 2018, inflation may become elevated for the full year.

"We think the market underestimates the risk of inflation in 2018 and 2019. If CPI inflation rises above 3% and stays elevated, and the Fed continues its rate hike cycle, we see upside risks to interest rates and downside risk to growth in China."