China: Price pressure

Wednesday, May 28

China’s consumer price inflation (CPI) came in at 8.5% for April, reflecting strong and continuing pressure on prices. The main driver continues to be food, although prices of other goods are also showing upward pressure:

• April food prices rose by 22.1% from a year earlier. A very rapid rise in pork prices has seen other food categories become susceptible to even small shocks, as price pressures weigh on a wide range of foods through substitution.
• With global grain prices on the rise, local prices for the staple increased by 7.4% over last year, even though price controls have been imposed here.
• Non-food inflation remains relatively low, at 1.8%, yet it is only a matter of time before wages increase in response to the high level of food price inflation and companies begin to pass increased costs on to consumers.

This high inflation compels the monetary authorities to continue monetary tightening, with further increases in reserve requirements; possible interest rate hikes; and strict imposition of lending quotas.

This will create difficulties for stock market and real estate investors who are used to easy credit, with the real estate market, in particular, showing signs of a general slowdown.