China’s Inflation Peaks

As expected China’s consumer price inflation rose in July, hitting 6.5% year-on-year, up from June’s 6.4% and remaining at a three-year high. Food, particularly pork, was the driver. With the latest monthly increase being just one tenth of a percentage point, we now look to be at or close to the peak. Signs are that food prices are moderating, at last, in response to administrative measures to bring them down; ditto with property to an extent. Ten months of monetary tightening are also starting to have their effect, with the economy slowing up (9.5% GDP growth year-on-year in the second quarter vs 9.7% in the second quarter). But just as the economy is still growing at above goal pace, so we expect inflation for the year to exceed the target 4%. The moderate monetary tightening is likely to continue.

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