China | China’s low inflation environment bears some changes

The low inflation environment in China during the past two years when China “first-in, first-out” of the pandemic while the rest of the world was grappling against the coronavirus has started to bear some changes recently with the CPI trending up.

Key points

• Key points:
• Several macro factors both globally and domestically contribute to this change: the imported inflation of energy and agricultural commodities due to the western countries’ sanctions for Russia; Chinese authorities’ strict “zero tolerance” COVID-19 policy and the lockdown measures in Shanghai led to supply-side stagnacy and supply-chain disruptions.
• China’s special African Swine Flu effect which was the prime reason to sustain China’s previous low inflation environment also has been dissipating over time. And low base effect of the past year also plays some role.
• Amid a changing inflation environment, together with the aggressive US Fed interest rate hike and central bank balance sheet reduction, the policy room for the PBoC to conduct interest rate cut might be shrinking, posing new challenges of policy maneuver to offset the adverse effect of lockdown.
• In particular, April’s CPI index edged up to 2.1% y/y from 1.5% y/y in the previous month, supported by escalating prices of energy and agricultural products.
• Looking ahead, we expect CPI may continue to pick up due to the low base effect of the past year and the reasons stated above and we maintain our prediction of 2022 and 2023 CPI both at 2.5%.

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