China CPI surprises with sharp drop in February

The cost of living in China plummeted in February as food price inflation retrenched sharply with the passing of the Lunar New Year Holidays.

At the headline level, the rate of gains in the country's consumer price index fell from a 32-month high of 2.5% year-on-year in January to 0.8%.

That took economists, who were expecting a far smaller slowdown to 1.7%, by surprise.

Hence, if the People's Bank of China tightened monetary policy in 2017 it was unlikely to be as a result of heightened inflationary pressures, economists said.

A rapid unravelling of fod prices were mostly to blame, with the rate of food price inflation collapsing from 2.7% year-on-year in January to -4.3% last month.

Outside of food on the other hand, prices were far more stable, slipping from a 2.5% rate of advance in one month to 2.2% in the next.

In parallel, the rate of Chinese producer price inflation picked up from a 6.9% year-on-year clip in January to 7.8% in February - the quickest pace since 2008.

The best way to glean the true trend - and iron-out the holiday-induced distortions - was to combine the January and February figures, said Julian Evans Pritchard, China economist at Capital Economics.

He estimated that on that basis China's CPI rose by 1.7% at the start of the year, down from a gain of 2.2% in the last quarter of 2016.

Thursday´s figures came on the heels of another economic surprise out of China the day before, as customs data revealed the country had sunk into a rare trade deficit in February.

"Since consumer price inflation in the coming quarters is unlikely to breach the 3% upper bound of policymakers’ comfort zone announced on Sunday at the National People’s Congress, we expect any further tightening of policy this year to be driven by concerns about credit risks rather than efforts to contain inflation."