Chinese CPI inflation could fall below 2% by July

22nd June 2012 by Simon Ward

Chinese food prices normally fall in June and July – the average decline in the CPI food index over the two months was 1.5% over 2001-2011. The drop this year could be larger than average, judging from continuing marked weakness in weekly food price data – see first chart.

Supply-side problems contributed to an unusual 2.1% rise in the CPI food index in June / July 2011. If the index falls by 1.5% over the two months this year, in line with the 2001-2011 average, annual CPI food inflation will subside from 6.4% in May to 2.8% in July.

Food accounts for about one-third of the CPI basket, while non-food inflation was just 1.4% in May. Assuming the latter remains stable, a fall in the food component to 2.8% would pull aggregate annual CPI inflation down from 3.0% in May to 1.8% in July.

Chinese repo rates have firmed this week, possibly reflecting late quarter liquidity pressures – second chart. With inflation continuing to fall sharply, the authorities are likely to wish to sustain the trend towards easier monetary conditions by announcing an early further cut in banks’ reserve requirements.

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