China's Inflation Comes In Hot; Here's Why It Won't Last

With China launching an aggressive fiscal and monetary stimulus over the past 2 months to keep its economy humming in response to Trump's trade wars, coupled with the sharp depreciation in the Chinese Yuan ever since Trump launched his first round of tariffs on Chinese imports, whisper expectations ahead of today's CPI and PPI data out of China were of an upside surprise to consensus expectations even as some analysts were concerned that China's trade war-driven slowdown would hit its inflation data.

Well, this time the "whispers' won, with both August CPI and PPI coming in stronger than expected, as consumer prices rose 2.3%, higher than the 2.1% consensus (at the top end of the forecast range of 1.6% to 2.3%) above last month's 2.1% and the highest since February; PPI also came in stronger, printing at 4.1% above the 4.0% expected, if well below July's 4.6%.

The modestly stronger (than expected) CPI will bolster the case for PBOC support of the Yuan, as continued currency weakness would only lead to further gains in inflation (just ask Erdogan). That said, the offshore Yuan was largely unchanged on the news, as despite the small uptick inflation remains muted, and will not be a major concern for the central bank.

As for PPI, despite today's beat expect further weakness, because as go China's commodities, and especially coal, so goes PPI, and in light of the ongoing commodity market weakness (once again courtesy of Trump's trade wars) there is no reason to expect wholesale Chinese inflation to rebound any time soon:

Finally, while inflation this month may have come in hotter than expected, the far bigger risk is one of deflation, largely as a result of the ongoing collapse in China's credit impulse, which leads the industrial metals commodity index with a 15 month lead, suggesting that commodity prices are set for a sharp drop in the coming year.

And speaking of China's credit impulse, recall the dire forecast laid out by Goldman yesterday, which expects a sharp - and deflationary - collapse in Chinese consumption as a result of what the bank expects to be the worst credit impulse print this decade as soon as next quarter.

In other words, enjoy the "stronger than expected" inflation prints out of China. They won't last.