China’s consumer price index (CPI) was unchanged from a year earlier in June, down from 0.2% growth in May. This was below the expected rise of 0.1%, according to the Chinese financial data provider Wind, and was the lowest growth since February 2021. Beijing has set a CPI target of around 3% growth for 2023. The decline in inflation in June was mostly driven by non-food factors, as food price inflation has shown some signs of stabilizing, analysts from Nomura said. Within the CPI, food prices increased by 2.3% from a year earlier in June, compared with a rise of 1% growth in May. Non-food prices, meanwhile, decreased last month, year-on-year, falling by 0.6% after having remained flat in May. Prices for pork, a staple on Chinese dinner tables, decreased by 7.2% in June compared with a year earlier, while fruit prices increased by 6.4% and vegetable prices increased by 10.8%. China’s core consumer price inflation rate, excluding the volatile prices of food and energy, increased by 0.4% in June compared with a year earlier, down from a 0.6% growth in May.
China’s producer price index (PPI) fell by 5.4% in June, year-on-year, down from a fall of 4.6% in May, to its lowest point since December 2015 after remaining in deflationary territory for the ninth consecutive month. This was below expectations, with the PPI having been expected to fall by 5% last month, according to Wind. The PPI reflects the prices that factories charge wholesalers for products. “The decline in PPI inflation in June was largely due to sequential price declines across a wide range of domestic raw materials, despite a lower base carried over from last year compared with May, as the initial effects from the Ukraine crisis started to moderate more meaningfully around this time last year,” said analysts at Nomura.
Analysts at Nomura expect CPI inflation to slip further in July to minus 0.5%, year-on-year, due partly to a high comparison base, even while taking into account a potential rise in service inflation as a result of the summer holiday season. They expect PPI inflation to rebound moderately to minus 4.5%, year-on-year, in July, mostly due to a lower base. “The ultra-low inflation reading lends support to our view that the People’s Bank of China (PBOC) is likely to implement two more rounds of policy rate cuts of 10 basis points each, and another 25-basis-point cut to the reserve requirement ratio (RRR) over the rest of the year,” Nomura’s analysts said. “PPI deflation is likely to ease somewhat in the second half of the year, partly because infrastructure spending should put a floor under commodity prices. And core inflation could rise gradually, as a relatively tight labor market puts greater upward pressure on wages,” said economists at Capital Economics.
“Fuel-price deflation, a key factor behind subdued headline inflation recently, will probably wane over the coming months. As such, we expect headline inflation to rise to around 1% by the end of this year,” they said, as reported by the South China Morning Post.
