China consumers face severe inflation in food prices as African swine fever led to more than a doubling of the price of pork, a daily essential protein source for Chinese consumers.
The impact of rising food prices will have knock-on effects on monetary policy, consumer behaviour and even the outcome of the US-China trade talks.
October’s consumer price index (CPI) hit a seven-year high of 3.8% year-on-year, beating analysts’ forecast of a 3.3% rise. This is largely attributed to a broad-increase in meat prices as African swine fever has led to a 40% year –on-year decline in China’s pork production. The spill over effects to other food prices have already started to show and may translate into higher wage-growth demand.
Core inflation which excludes food and energy prices remain tepid at around 1.3%. Pork price alone explains about 2/3 of the overall inflation rise.
On the other hand, China’s producer price index (PPI), which is a key indicator of manufacturing profitability has fallen 1.6% year-on-year. This suggests external demand remains weak and the current cyclical slowdown has not bottomed out yet.
Rising food prices will likely inhibit the People’s Bank of China (PBoC)’s ability to carry out monetary easing, although there is a need to do so in order to cushion the current slowdown. The PBoC has recently cut the 1-year MLF (medium term lending facility) rate by 5bps, a signal that easing is much needed but that can only be carried out at small magnitudes as the current inflation rate is very high.
As food prices soar, consumers will probably hold back spending on other discretionary items such as toys, furniture, entertainment, electronics and cars. The impact will slowly kick in as the Lunar New Year season draws nearer when demand for meat peaks.
As China’s demand for meat increases, Beijing will be more willing to and perhaps have a sense of urgency to purchase agricultural products from the US. This demand has ignited the prospect of a phase one trade deal to be signed before year end.
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