Conditions Set For Inflation Surge

The central government-sponsored credit binge that began in Q109 remains in full swing, although its impact on consumer price inflation is only just being felt. While consumer price inflation came in at just 2.4% y-o-y in March, rising supply side pressures and continued strong demand should begin to push prices aggressively higher over the coming months. Even with the likely implementation of two 27-basis point interest rate hikes and 3.8% appreciation of the Chinese yuan against the dollar, the lack of central control over monetary/fiscal policy has caused us to revise up our 2010 average consumer price inflation forecast to 3.6% from 2.8%.

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