2 reasons why China inflation will rebound to 3.1% by end 2012

Inflation will trend down to 2% in Q3 but it will edge up until 2Q13.

According to Nomura's Asia Special Report, China's inflation is expected to trend down in Q3 to 2% then rebound to 3.1%, 3.5% and 4.2% in Q4 2012, Q1 2013 and Q2 2013, respectively, for two reasons.

Here's more from Nomura:

First, policy easing will likely push GDP growth to above its potential after Q3, leading to a positive output gap. Second, higher soybean and corn prices in the international market will likely push up pork prices, as China relies on imported soybeans and corn to feed pigs. Indeed the ratio of pork prices to corn prices has dropped to near its historical low, and the government has intervened to purchase pork in order to reduce the volatility of pork prices.

If global commodity prices rise by 20% in the next 12 months, we expect China‟s inflation to pick up marginally faster in H2 2012, and then more visibly in 2013. CPI inflation could rise to 5.0% by Q2 2013, and force the People‟s Bank of China (PBoC) to hike interest rates. If the global economy collapses and commodity prices plunge by 20%, we expect CPI inflation to drop to 1.7% in Q3 and Q4, and then rebound but remain below 3% in H1 2013.

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