China Inflation


Inflation climbs amid buoyant economic growth

In March, consumer prices rose 5.4% over the same month the year before, which was above the 4.9% reading tallied in February and market expectations of a 5.0% increase. In addition, annual average inflation showed a strong outturn of 4.1% (February: +3.8%), exceeding the government target of 4.0% set for this year. However, on a monthly basis prices declined by 0.20% in March, following the demand spike related to the Chinese New Year holidays. The main drivers behind the annual increase were both foodstuff price rises of 11.7% (February: +11.0% year-on-year), and increases in non-food prices of 2.7% yoy (February: +2.3% yoy). Meanwhile, housing prices advanced 6.6% over the same month the year before (February: +6.1% yoy). That said, the March figures also reflect a low comparison base from the previous year. Inflation is gaining momentum in China, in spite of authorities' efforts to tame rising prices and highlighting inflation as the top priority for macroeconomic policy this year. Therefore, most analysts expect additional interest rates hikes this year, together with further increases in the reserve requirement ratio for lenders. In addition, the government may allow a faster currency appreciation to stem the impact of rising commodity prices. Meanwhile, producer price inflation continued pointing upwards, adding further pressure on consumer prices in the near term. In March, the producer price index (PPI) added 7.3% over the previous year, a notch above February's print of 7.2% but 0.1 percentage points below market expectations. The annual PPI average inched up to 6.0% in March from 5.8% in the previous month.

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