Why China need not worry despite inflation jumping to 2.7%

Even as food prices also rose to 4.9%.

According to BBVA, June headline inflation rose to 2.7% y/y (BBVA: 2.4%; consensus: 2.5%) from 2.1% in May on higher-than-expected food prices (pork and vegetable prices).

Food price inflation ticked up to 4.9% y/y (3.2% in May), while non-food inflation remained flat at 1.6% y/y. Meanwhile, producer price inflation remained negative at -2.7% y/y, but was up from -2.9% in May.

Here's more from BBVA:

Besides food prices, the rise in headline inflation was due to a low base effect from last year. With growth momentum slowing, we do not interpret the outturn as reflecting underlying inflationary pressures and, moreover, it is still well within the government’s 3.5% comfort range.

As such, there continues to be room for monetary policy easing if needed, although we do not currently expect such stimulus in view of the authorities’ emphasis on curtailing financial fragilities.

We expect inflation to rise gradually over the course of 2013 on base effects and a cyclical upswing in food prices. Full-year inflation should average 2.8% for the year, and is unlikely to rise above 3.5%.

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