China's inflation climbed 3.2% in February

Analyst calls it the "Lunar New Year effect".

According to BofAML, due to the different timing of the Lunar New Year (LNY) holiday, China's CPI inflation jumped to 3.2% yoy in Feb from 2.0% in Jan. 

Here's more:

PPI inflation in Feb was -1.6%, unchanged from in Jan. We expect limited market and policy impact as investors/officials understand the LNY distortions quite well.

Though policymakers should be wary of inflation later this year with economic growth recovery, it's too early to call for significant monetary tightening yet. And we should be cautious that some people may use this artificially high CPI to support their warning about monetary tightening.

CPI could be a potential concern but not a big threat yet

The 3.2% CPI is slightly above market expectations, but it's hard to accurately forecast yoy CPI inflation around LNY holiday. If we take the average of Jan and Feb, CPI inflation was 2.6% yoy in Jan-Feb, slightly above 2.5% in Dec 2012.

We expect CPI inflation to "fall back" to around 2.5% in March again, remain below 3.0% before mid-2013, and then rise to 3.5-4.0% at year end. We stick to our annual CPI inflation forecast (average of yoy monthly CPI inflation) at 3.0% for 2013.

We believe that if Beijing can curb investment demand (by effectively targeting 8.0% growth in 2H), inflation should be under control. Yi Gang, PBoC's deputy governor, recently said that 3.0% CPI inflation could be achieved in 2013.

Finally, we may also note that China's CPI inflation might stay around 3% to 4% in coming years on rapidly rising labor costs.

Why the CNY holiday makes yoy CPI inflation volatile?

The CNY holiday started from 9 Feb this year but in 2012 they started on 22 Jan, and food prices usually surge prior to the CNY and normalize afterwards. This means that year-over-year CPI would first dip in Jan and then jump in Feb before it weakens again in March. 

Note food inflation rose to 6.0% yoy in Feb from 2.9% in Jan with vegetable prices surging 10.0% yoy after rising 2.6% in the prior month. Vegetable prices contributed 34bp to a 3.2% CPI inflation in Feb (vs. 9bp in Jan).

On the other hand, pork prices fell 1.0% yoy in Feb after declining 5.0% in Jan. Meanwhile, non-food inflation climbed to 1.9% yoy in Feb from 1.6% in Jan. Actually prices of vegetable and meat have already declined quite a lot post the LNY holiday.

In the two weeks post the LNY holiday, vegetable prices slumped 14.5% and meat prices fell 3.7%.