China’s Surprise Inflation Doesn’t Mean ‘Final Demand Recovery’: 4 Takeaways from July Data

The headline CPI beat the 0.29% growth expected by economists polled by Chinese financial data provider Wind.

Within the CPI, food prices remained unchanged in July after falling 2.1% in June, while non-food prices increased last month, year-on-year, rising 0.7% after increasing 0.8% in June.

Rising pork and vegetable costs have pushed up overall prices, with pork prices recording the fastest annual growth since 2022.

In contrast, non-food inflation slowed slightly, pulled down by transport equipment, communications equipment and rents.

On a monthly basis, China’s CPI rose 0.5% in July after falling 0.2% in June.

“The surprising rise in CPI inflation was mainly due to high food price inflation, which was largely driven by adverse weather conditions in parts of the country, including extremely high temperatures and flooding,” Nomura analysts said.

2. Ex-factory prices remain low

China’s producer price index (PPI) – which measures the cost of goods at the factory gate – fell 0.8% last month, down for the 22nd consecutive month and matching the decline seen in June.

This reading is in line with the expected 0.78% decline projected by Wind.

Sequential producer price inflation also remained subdued in July, at minus 0.2% month-on-month, unchanged from June.

“The weakness in the PPI, despite a low base compared to last year, was due to both weak domestic demand and falling global commodity prices,” Nomura analysts said.

3. Core inflation falls

China’s core inflation, which excludes volatile food and energy prices, rose 0.4% last month from a year earlier, down from 0.6% in June.

Nomura analysts had expected core inflation to remain at 0.4% in August.

4. Inflation is expected to increase slightly in the coming months

Nomura analysts expect CPI inflation to rise further in August to 0.6% year-on-year, due to extreme weather conditions.

“Given that core inflation actually fell to 0.4% yoy in July from 0.6% in June, we believe the increase in headline CPI inflation does not reflect a recovery in final demand and therefore will have no impact on policies and interest rates,” they added.

Producer price inflation could fall again to minus 1.2% year-on-year in August due to lower global commodity prices, according to Nomura.

With low inflation and weak credit activity, domestic factors continue to support further monetary policy easing

“We expect economic growth to continue to decline in the second half of the year due to worsening headwinds, and Beijing may be forced to step up its support measures in the fourth quarter,” they added.

Lynn Song, chief economist for Greater China at ING, agreed that conditions were ripe for inflation to rise a little in the coming months, but added that this should not prevent further monetary easing.

“With low inflation and weak credit activity, domestic factors continue to support further monetary policy easing,” he said.

“We continue to see at least one further rate cut this year, with the possibility of a further cut if global rate cuts accelerate.”