China's January CPI came in at +4.9% y/y in January, up from +4.6% in December. The reading was in line with the latest speculation. The National Statistics Bureau (NBS) reweighted the basket but it was smaller-than-expected increase in food price that contributed to the inflation data, rather than the reweighting. The set of data should not ease the PBOC's tightening schedule. We expect to see more rate hikes and rises in RRR later this year.

The market had initially expected inflation to surge to +5.4% y/y in January but then revised the forecast lower to +4.9% amid speculations of a big cut of food weight. Yes, the NBS did that, with the weight of food lowered to 30.2% from 32.4% while that of residence lifted to 19.2% from 15.0%. However, contrary to market expectations, the reweighting 'raised' the annual CPI by +0.024% in January, rather than lowering it. Food prices expanded +10.3% y/y in January, up from +9.6% in December, while non-food prices added +2.6% during the month, up from +2.1% in December. The rise in food price was below expectations despite purchases ahead of Chinese New Year. The smaller-than-expected increase in food prices indeed kept CPI below 5% for another month.

Inflationary pressures appear to be smaller than market expectations and CPI may decline moderately in February. However, we believe inflation will remain the key risk to the economic outlook in China and the government will continue to tighten so as to curb inflation and asset bubbles.

Concerning the impact of China's rate hikes on commodities, we have researched on the movements of oil and gold prices before and after the People's Bank of China (PBOC) raised interest rates over the past 3 years. The chart below shows that both oil and gold prices gain over the 15 trading days after the rate hikes.