China’s inflation cooled in October amid falling food prices
Lead — China's inflation has notably cooled in October, primarily due to a substantial decline in food prices, especially fresh vegetables, which plummeted 16.9% YoY. Per the full note from ing-think, headline CPI dropped to 0.7% YoY, beneath the market's expectations of 0.8%. This trend suggests that while inflation remains positive, it is well below target, with core inflation dipping to a nine-month low of 0.8%. With no upcoming high-impact events on the calendar, market participants should focus on production price trends as potential indicators for consumer price movements ahead.
What the desk is arguing
The desk believes that the moderation in China's inflation is a key indicator of subdued pricing power in the economy. The cooling inflation, driven primarily by sharp declines in vegetable prices and persistent softness in pork prices, may limit China's central bank from adjusting its policy towards tightening in the near term. As highlighted in the ing-think report, food prices contributed significantly to overall inflation trends, with CPI dropping to 0.7% YoY in October.
Additionally, while core inflation remains stable within a narrow range of 0.8-1.2%, the underlying pressures suggest little room for a policy pivot. With producer price index (PPI) inflation reaching 5.7% YoY, elevated production costs could inevitably spill over to consumers, but for now, the inflation outlook remains benign, suggesting the PBOC may remain accommodative.
Where it sits in our coverage
Our internal consensus for the USD/CNY pair stands at 1.075, with the following targets noted: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's reading aligns with the jpmorgan perspective, suggesting continued strength in the dollar against the yuan as inflationary pressures are subdued. The projected target from bofa indicates a more bearish stance, positioning them outside the bullish consensus.
How other firms see it
The outlook is largely aligned among several major firms, with bloomberg and goldmansachs sharing a similar view on the potential for continued yuan weakness. Conversely, bofa maintains a cautious stance, anticipating a stronger yuan against the dollar due to different economic catalysts.
Coincidentally, the USD/CNY trajectory will remain indicative of broader market responses to PBOC policy decisions, especially amidst ongoing geopolitical tensions affecting trade dynamics between the US and China. Traders should also be alert to shifts in the broader risk sentiment reflected in the AUD/USD pairing influenced by commodity price fluctuations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's inflation cooled to 0.7% YoY in October, below expectations.
- 02Core inflation dipped to a nine-month low of 0.8%.
- 03Producer price index growth may introduce future consumer price pressures.
- 04The consensus predicts a slightly bullish dollar against the yuan.
Market implications
Traders should closely monitor the dollar's performance against the yuan, particularly around the 1.075 mark. Observing shifts in producer prices will be crucial, as they serve as a bellwether for consumer price trends moving forward.
Risks to this view
A sharper-than-expected rekindling of consumer demand or government intervention in food prices could lead to an inflation surprise, forcing a reevaluation of the PBOC's stance and potentially altering the bullish outlook on USD/CNY.
Older quick take Quick take Published 02:51 China Translate China’s inflation cooled in October amid falling food prices China’s inflation moderated as food costs matched a 13-month low, driven by a sharp decline in vegetable prices. Core inflation dipped to a 9-month low of 0.8%. China has emerged from deflation this year, helped by firmer energy and technology prices, but inflation remains well below target 0.7% YoY China's headline CPI inflation Lower than expected CPI inflation moderated in October China’s CPI inflation fell to 0.7% year-on-year, down from 0.9% and slightly below expectations (market: 0.8%, ING: 0.8%).
This brings the year-to-date inflation to 0.9% YoY. Food was the main drag on inflation, with prices falling to a 13-month low of -2.9% YoY. The main culprits were fresh vegetables (-16.9%), pork (-8.6%), and fresh fruit (-3.8%) prices.
The drag from pork prices has eased in recent months, but a sharp sequential decline in vegetable prices has largely offset it. By comparison, non-food inflation was unchanged at 1.5% YoY on the month. We continue to see a strong boost from transportation fuels (20.2%) amid higher oil prices, and communication appliances (16.1%) due to more expensive tech components.
Other categories such as healthcare (2.4%), Education, Culture, and Entertainment (1.5%), and clothing (1.1%) generally saw modest positive inflation. Cutting through the noise, core inflation of 0.8% YoY edged down to a 9-month low, but it has stayed within a relatively narrow range of 0.8-1.2% year to date. PPI inflation rose to 5.7% YoY in October, extending its climb to fresh cycle highs, as we saw an outsized boost from mining and excavation (27.9%) and raw material (11.6%) prices.
By industry, coal mining (36.6%) and oil and gas extraction (35.0%) saw the biggest boosts. If higher producer prices hold, these costs should be passed on to consumers. We think inflation will remain low but positive heading into 2027.
Inflation cooled slightly amid falling food prices Monetary Policy Inflation China Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Lynn Song Chief Economist, Greater China Older quick take
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