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Sort of OK news and bad news on inflation out of China over night.

The Consumer Price Index rose by just 2.1% year-over-year in December. Economists had been looking for inflation to increase by 2.2%. A slower than expected increase in the price of vegetables, a key consumer category in China especially in the winter, was responsible for the restrained consumer inflation.


…the Producer Price Index, a measure of factory level inflation, jumped by 5.5% in December from December 2015. That was above the 4.6% expected by economists surveyed by Bloomberg and a huge jump from the 3.3% year-over-year rate recorded in November. The increase was the fastest in more than five years and continues the swing in China’s manufacturing sector from an exporter of deflation–where do you think those ever lower prices at Wal-Mart came from?–to an exporter of inflation.

And the higher Producer Price Index will put pressure on global supply chains just as companies are trying to figure out what the trade policies of a Trump administration might be.

The Producer Price numbers put the People’s Bank of China in a “interesting” position. On the one hand, the high inflation rate at this level of the economy gives the central bank room to raise interest rates to fight inflation. That would have the important secondary effect of strengthening a yuan that is currently under pressure.

But raising interest rates could, potentially, slow the Chinese economy at a time when Beijing would dearly love to keep growth from slipping below 6%.

The difference in inflation rates between factory and consumer prices also means that the People’s Bank could simply ignore the rise in the Producer Price Index until it begins to find its way into higher prices at the consumer level.