China's producer price inflation accelerates

In line with consensus expectations including ours, the acceleration in China’s producer price inflation (PPI) continued in October. The annual rise of producer prices reached a 26-year high of 13.5% yoy (September: 10.7%, consensus: 12.3%).  The renewed rise in PPI inflation over the past months is still mainly driven by commodity-related sectors, resulting from the global rise in commodity prices, and aggravated by a domestic power crunch. Producer price inflation will likely stay high for a while, although underlying pressures have started easing. We have seen some correction in commodity prices and some easing of energy-related policies in China. Meanwhile, the gap between PPI and CPI inflation has risen to a new historic high of 12 %-points, even though there are more signs of a passthrough of higher PPI-inflation into consumer price inflation (CPI). CPI inflation rose to a 13 month high of 1.5% yoy in October (September: 0.7%, consensus: 1.4%). While the passing through of higher costs by producers is playing an increasing role in the rise of CPI inflation (non-food prices rose by 2.4% yoy), so is the fading of food price deflation. Still, consumer price inflation as well as core inflation (1.3% yoy in October) remains rather subdued, partly reflecting the weak state of domestic demand. All of this should still leave some room for a moderate, 'piecemeal', policy easing to support growth in our view. We still expect a 50bp RRR cut in the coming months, next to ongoing moderate fiscal support in the form of increasing the financing space for local governments.