China: Downside inflation surprise in February, tightening still expected - Danske Bank

According to analysts from Danske Bank, the CPI inflation in China came lower-than-expected likely due to the end of the Chinese New Year. They expect to see a rebound in March.

Key Quotes: 

Today’s CPI inflation figure for China for February surprised sharply on the downside, falling to 0.8% y/y (consensus 1.7% y/y, previous 2.5% y/y).  The decline was due mainly to a big fall in food prices, from 2.7% y/y to -4.3% y/y.” 

“Core CPI (excluding food) also fell slightly,to 2.2% y/y from 2.5% y/y in January. However, the trend is still up. It is likely the fall in inflation is due to the end of Chinese New Year and we expect to see a rebound in March.”

“PPI inflation rose more than expected to 7.8% y/y –the highest rate since 2008. It is more than signalled by commodity prices and suggests pricing power has improved. However, we expect PPI to peak soon.”

“Weaker CPI inflation implies downside risk to our forecast of two rate hikes in H1. However, as we still see an overshoot of the 3% target in the spring (due to pass-through from PPI), we continue to expect policy tightening.”