Looking Forward to China May CPI

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Coming up overnight, we have one of the more important global economic events for the week: the May Chinese inflation data.

This often affects not only the yuan but also the AUD, NZD, and JPY. With Chinese regulators keeping the onshore price of the currency in check, this data can actually have a larger effect outside of the world’s second-largest economy.

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The relevant concerns for traders are what the data will say to the PBOC as well as the Chinese government. And both of them have been trying to stimulate the economy. Inflation growth is generally associated with economic growth, so variations can affect fiscal and monetary policy.

Higher or Lower, What Does it Mean?

The reaction to the data is likely to depend just as much on why there is a change in the numbers, as the actual change itself. Higher inflation due to increased consumer demand would be in a largely positive sign for the Chinese economy. It would also lower expectations of further intervention.

Higher inflation driven by increased prices because of supply issues would not be a good sign. In fact, the government might actually step up subsidies to help people cope.

On the other hand, lower inflation would broadly be negative, whether that’s because of increased supply, or a drop in consumer demand. This would likely increase the chances of intervention by the PBOC to get the CPI rate more in line with their targets.

What We Are Looking For

Generally, the market focuses on the month over month comparative data, even though regulators care more about the annualized figure. This is because the monthly data is considered “fresher”.

The consensus is that monthly CPI will come in at -0.2%. This would be a decrease from the 0.1% of the prior month. It would also bring the yearly figure to 2.6%, an increase from 2.5% prior.

The PBOC has a target of “around” 3.0%. So, if the expectations are met, they could be satisfied.

The Trends

Monthly CPI tends to fluctuate between -1.0% and +1.0%. Anything beyond those ranges is quite likely to substantially move the market. On an annualized basis, inflation has been progressively ticking up since March, even while the trade situation seemed to be going well.

One of the drivers of inflation was food prices. And the effects of African swine flue on pork prices helped edge consumer prices up. However, in the last month, pork prices have leveled off and remained flat, while other foodstuffs have spiked. Unlike other countries, food accounts for around a third of the CPI basket.

Alternative Views

This focus on food costs is what has led some analysts to speculate that inflation might be positive for the month. Wholesalers are experiencing a double impact of weather and diseases affecting crops that have reduced supplies.

Normally in May, there is an increase in prices just before the new harvests start arriving in June. However, it seems to be especially acute this year.

Outside of China, higher inflation might be interpreted as negative. This is because that would lessen the chance of looser monetary policy and capital flows towards countries that have China as their largest customer. Conversely, if the data fails to meet expectations, we might see other currencies bolstered.

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