China: Widening divergence between CPI and PPI – ANZ

Zhaopeng Xing, analyst at ANZ, suggests that for the Chinese economy, the consumer price index (CPI) and the producer price index (PPI) are both important indicators of changes in prices and underlying inflation over time.

Key Quotes

“Since 2016, China’s CPI and PPI have been negatively correlated since 2016.”

“Indeed, the divergence between China’s CPI and PPI has widened to 4.2ppt y/y in September. The divergence stems from China’s supply-side reforms, notably capacity reduction and property tightening, put in place since 2016. As a result, the prices in some sectors have soared due to reduced supply, but the prices at downstream sectors have remained relatively stable.”

“China does not have a single inflation gauge, so its monetary policy does not practise inflation targeting. The current policy preference is to implement measures specific to certain economic segments rather than broad-based easing. The magnitude of any cut in the benchmark interest rate will thus be relatively limited compared with other central banks.”