China’s inflation surges 6.2% in August

In line with market and our expectation, headline inflation is now on a downward trend. CPI rose 6.2% yoy in August, compared with 6.5% in the previous month. Food inflation moderated to  13.4% yoy, while nonfood inflation accelerated to 2.9%, contributing about one-third of the CPI increase. Sequentially CPI rose 0.3% from July, with the monthly growth of food prices moderated to 0.6%. PPI inflation also moderated to 7.3% yoy.

Is inflation pressure gone? It’s important to note that base effects are now playing a big role in the downward trend of the annual inflation. We estimate that base effects alone would have reduced the inflation reading by 0.6 ppts in August. The smaller actual reduction (by 0.3 ppts) reflects the sequential price growth.

What does this imply for the policy path? Policy makers are likely to be more paced in rate hikes, in light of the heightened global uncertainties and the favorable trend of headline inflation, though with the help of base effects. Nevertheless there is little scope to ease policies and, given the still negative real interest rate, we maintain our forecast of one more interest rate hike before the end of the year.