China’s Annual Inflation Spiked, Forcing a Market Rethink of Policy Easing Expectations

"The CPI does cut into room for further monetary policy easing for now. We don't think there will be an RRR cut before March," Wei Yao, China economist at Societe Generale in Hong Kong, told Reuters.

Markets showed little reaction to the data.

Inflation rebounded from a 15-month low of 4.1 percent in December. The consensus inflation forecast, also 4.1 percent, was blown away by a 10.5 percent surge over a year earlier in food prices, which make up roughly a third of China's consumer price index.

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Non-food prices rose 1.8 percent in January on the year, below December's 1.9 percent while producer price inflation came in slightly below consensus at 0.7 percent, underlining easing inflation pressures in the factory sector as global demand is dampened by Europe's festering debt crisis.

The distorting impact of the Lunar New Year has led the government to delay the release of factory output, investment and retail sales data for January. It will combine them with February numbers published in March to smooth out the impact.

"The central bank is more likely to maintain its current monetary stance for now and may wait for February data to decide on its next policy move," said Wang Jin, analyst at Guotai Junan Securities in Shanghai.

The People's Bank of China cut the RRR in November for the first time in three years, taking 50 basis points off the record 21.5 percent level.

More cuts are expected in coming months. A Reuters poll in January forecast a total of 200 bps through 2012, though the central bank has opted in recent weeks for open market operations to inject short-term liquidity into the financial system to keep credit flowing.

Few economists believe the central bank will cut outright lending rates this year while annual inflation stays stubbornly higher than the one-year deposit rate of 3.5 percent. A cut could prompt Chinese to divert their bank savings into more speculative investments, such as the stock market.

EASING TREND INTACT

Provided January's jump higher does not turn into a trend, many economists expect inflation in February to soften and continue the pattern through 2012 to come in below 4 percent for the year as a whole, allowing Beijing to maintain a gradual, targeted easing of monetary and fiscal policy.

"With demand weakening this year, we believe disinflationary pressure will continue to exert itself through 2012, bringing full-year CPI to around 3.5 percent," Ren Xianfeng, senior China analyst at IHS Global Insight in Beijing, said in a client note.