Risks to China’s inflation outlook are adjusting after four years of limited price pressures. The base case has not changed, as monetary and credit growth remain weak, suggesting low consumer and producer price inflation levels later this year and into 2019. However, the probability distribution of inflation risks is shifting higher, caused by worries about pork prices and the impact of rising crude prices on the agricultural sector. Bond market concerns about rising issuance of local government bonds increase sensitivity to any high-side surprise in headline CPI, which would probably accelerate steepening of the yield curve.
