China: Despite Rising Food Prices, Deflation Foreseen

Daily Analysis - 18/02/2016

Pick Up in Consumer Price Inflation Led by Food Staples

Chinese inflation climbed at a slower pace than anticipated in January, mostly guided by consumer demand in the lead up to the holiday season. Climate conditions also contributed to rising food costs but weather is expected to abate, with economists and analysts foreseeing a prolonged deceleration in inflation and potential deflation in the current year.

UK Unemployment Rate Remains at 5.1%

Unemployment in the United Kingdom remained unchanged for the month of December according to the Office for National Statistics. The report cited a 5.10% rate in unemployment for the month of December, unchanged from the previous month while missing estimates of 5.00%. Wages, including bonuses, met expectations, falling from November’s 2.1% to 1.9% for December whereas wages without bonuses rose 2%, above November’s 1.9% and forecasts of 1.8%. With the wage growth still far from the Bank of England’s goal of 3%, the central bank is in no rush to adjust policy and raise rates as evidenced by existing projections. Improvements in employment are a strong sign, but inflation near zero is keeping a lid on earnings growth. The UK Pound rose modestly versus the Euro over the session, with the EURGBP pair closing at 0.7781.

Slight Rise in US Producer Prices

Data released by the US Bureau of Labor Statistics showed producer prices recording gains during January. The monthly figure was reportedly at 0.10%, exceeding both estimates and December’s contraction of -0.20%. Services climbed by 0.50% with a 0.90% acceleration in trade services and transports rising by 0.40%. On an annual basis, headline producer prices managed to stem part of the contraction, falling by only -0.20% in January compared to -1% in the prior reading. Persistently low energy prices, a strong US dollar, and rising services costs continue to pressure wholesale prices downwards. Core producer prices also recorded gains for the month of January with the monthly figure up 0.4% and annually improved by 0.6% versus previous month’s 0.2% and 0.3% respectively. Gains in the US dollar saw gold prices dip, with the precious metal trending near $1,205 per troy ounce.

China’s Inflation Improves

Concerns about disinflation were allayed modestly following the consumer price index report from the Chinese National Bureau of Statistics for the month of January. The 1.8% print came in higher than the December’s 1.6% reading but failed to meet consensus estimates of 1.9%. Food prices climbed by 4.1% whereas non-food prices rose at a slower pace of 1.2%. Over the same time period, consumer goods ascended by 1.5% and services gained 2.2%. February’s reading is anticipated to be even stronger on the back of expectations that food prices will be higher due to bad weather conditions and grocery spending for the Lunar New Year. These inflation levels are likely to prove transient and temporary, with economists expecting seasonal conditions to subside, likely paving the way towards renewed disinflation and possible deflation. The Chinese Yuan gained modestly versus the US dollar overnight, touching lows of 6.5158 before rebounding slightly.

South African Inflation Surges

While most advanced economies are struggling to stimulate inflation, consumer prices across South Africa continue to climb, reaching highest levels since August 2014. Statistics South Africa reported annualized inflation growing at 6.2% for the 12-months through the end of January, leaving behind expectations of 5.9% and the prior figure of 5.2%. Higher costs for electricity, food, transportation and alcohol amid the continuing weakness in the South African Rand and an ongoing drought largely contributed to the ascent. On a monthly basis, headline consumer inflation jumped by 0.8% during January, rising well beyond the prior month’s 0.30% and forecasts of 0.50%. The central bank opted to raise interest rates to 6.75% in January in an effort to thwart rising inflation, but so far measures have been ineffective. Policymakers expected inflation to keep climbing, with the central bank under pressure to initiate even tighter monetary policy to counteract the rise.