The strength of China’s growth is a sign that monetary tightening has not had a significant impact and that more needs to be done to control inflation, which remains the top risk.
Global commodity prices surged in December and continue to do so in January. China’s food prices also showed a sharp rise since the middle of December. Poor climate has again taken vegetable and fruit prices hostage, just ahead of the Lunar New Year holiday. Non-food prices are also rising on excess liquidity, wage and other cost increases. As a result, inflation expectations, as measured by the central bank, have exceeded the 2008 peak.
These forces would ensure that the fall in CPI in December – to 4.6 per cent from 5.1 per cent in November – was short lived. We expect that the CPI could reach 5.2 per cent in January, with more upside in the first half.