(Bloomberg) -- China’s consumer inflation rose to a seven-year high last month on the back of rising pork prices.

  • The consumer price index rose 3.8% in October from a year earlier, up from 3% in the previous month
  • Factory prices fell by 1.6%, compared with the median estimate for a drop of 1.5%

Key Insights

  • Pork prices were up 101.3%, according to the National Bureau of Statistics
  • While monetary policy isn’t the solution for rising pork prices caused by a supply shock, the People’s Bank of China has stayed relatively restrained compared with other major central banks even as growth has slowed. The bank offered a mini-cut to the interest rate of 1-year bank funding this week amid a bond sell-off, while keeping the overall liquidity supply neutral.
  • “Given the pork price surges are transitory and bound to be short lived, monetary policy priority should be placed to address the worsening deflation risks rather than be concerned with transitory CPI inflation,” Liu Li-gang, chief China economist at Citigroup Inc. in Hong Kong, wrote in a recent note.
  • The central bank is seen to be in a bind, with consumer prices rising while producer prices fall. While further monetary stimulus would help companies struggling with weakening demand, deflation and higher tariffs, even faster inflation would hurt households more. The People’s Bank of China offered a mini cut to the interest rate of 1-year bank funding last week, while keeping the overall liquidity supply neutral.
  • “Persistent deflation in the industrial sector squeezes profitability -- reducing leeway for investment and hiring,” David Qu, economist at Bloomberg Economics in Hong Kong, wrote in a note.
  • CPI rose to the highest since January 2012, according to data compiled by Bloomberg.

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  • Some economists have said consumer inflation could rise to 4% soon on the back of surging pork prices

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net;Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net;Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Stanley James

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