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    China: Deflation pressure changed to inflation pressure at the producer level -  DanskeMatías Salord

    The Producer Price Index (PPI) in China increased further in May. According to analysts from Danske Bank, this is positive for industrial profits and signals that deflation pressures have changed due to higher commodity prices.Key Quotes:“Chinese inflation data showed a further increase in producer prices in May. PPI increased 0.5% m/m in May, the third monthly increase, driving the annual rate up to -2.8% (consensus -3.2% y/y) from -3.4% y/y in April. Deflation pressure has thus changed to inflation pressure at the producer level.”“As we have highlighted before, Chinese producer prices are driven mainly by commodity prices with a small lag and the increase in PPI is a mere reflection of higher metal prices at the beginning of 2016. Metal prices moved sideways in April and May and, in our view, PPI m/m changes should come down in June.”“The rise in producer inflation is positive for industrial profits and we estimate profit growth stayed positive in May.”“The main takeaway is that deflation pressure in the industry has changed rapidly due to higher commodity prices. As we look for a further gradual rise in commodity prices on the back of the pickup in Chinese construction, we expect producer price deflation to be over for now and see moderate inflation at the producer level. It has little implication for monetary policy, which is currently guided mainly by economic activity.”  

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