China:January CPI and PPI inflation modestly above market expectations

Main points:

CPI inflation came in at 2.5% year-on-year in January, above market and ourexpectations and also accelerated from December. Food prices were lowercompared with December (By our estimate, food CPI inflation was -5.1% monthover-month annualized, after adjusting for seasonality and floating Chinese New Yearholiday). A relatively warmer winter helped suppress fresh vegetables price increasein the Chinese New Year holiday month. Nonfood CPI inflation continued toaccelerate on a month-over-month seasonally adjusted basis, on the back of gasolineprice increase and higher tourism cost because of the Chinese New Year holiday.Core CPI inflation (excluding food and energy) was 2.2% yoy in January, vs 1.9% inDecember.

PPI inflation was +6.9% yoy in January, higher than market expectation and in linewith our expectation. This implies an annual rate of +14.5% (s.a.) in January, lowerthan +16.9% in December. Similar to the previous months, producer prices insmelting and pressing of ferrous and non-ferrous metal, coal mining and washing,and petroleum industries continued to increase strongly, contributing 5.7pp (out ofthe 6.9%yoy) of the headline PPI inflation, according to the NBS.

We expect policy makers to maintain their tightening bias, as activity growth appearsto be holding up and inflationary pressures remain. Looking forward, year-over-year