Further disinflation in China
Chinese inflation numbers disappointed again in January. Headline inflation fell to 1.7%, the second consecutive month that CPI came in below 2%, while producer prices rose just 0.1%, the slowest increase since September 2016. The PPI number, in particular, reveals that it’s too early to expect a major reversal of company performance. Producer prices are strongly linked to Chinese company earnings and it will take a while, and preferably some kind of trade deal with the US, before we see more signs of improvement. In addition, China’s PPI number is positively correlated to global inflation. Inflation expectations have plummeted in recent months, forcing central banks to take a more dovish stance on future monetary policy. The latest reading of Chinese producer prices emphasizes that these central banks, including the Federal Reserve, are unlikely to shift policy again any time soon.
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