First Insights: China: Fuel price hikes add to inflationary pressures

Economics Research | Asia Ex-Japan | Nomura
25 February 2013

First Insights: China: Fuel price hikes add to inflationary pressures

China last night announced a hike in gasoline and diesel retail prices, effective today. Increases of 3.5% and 3.8% have been applied, respectively, adding RMB300 and RMB290 to the prices per ton. This is the second major price hike announced in five days – on 20 February we saw the largest hike in the rail freight tariff rate since 2003, which was unusual in terms of timing as tariff hikes in Q1 are not common.

We reiterate our view that the government may move to lift other administratively suppressed prices, such as electricity and other public utilities in H1. Energy price reform has been on the top of the policy agenda since 2012, but was delayed due to concerns over slowing GDP growth. Now that growth has recovered while inflation remains low, the window for energy price reform has reopened.

We estimate the weight of gasoline in the CPI basket to be around 0.5%, so the direct impact of this hike on CPI inflation will be limited. But if further price hikes are in the pipeline, which we believe to be the case, then the combined effect on CPI inflation would be visible. This, together with slowing potential growth and a tight labour market, supports our view that CPI inflation will rise to 3.5% for full-year 2013 (Consensus: 3.1%) and to 4.4% y-o-y in H2 2013, causing the People’s Bank of China to hike interest rates twice in H2. We continue to expect growth to slow from 8.1% in H1 to 7.3% in H2.

Economists
Zhiwei Zhang