Softer than expected CPI and PPI readings reinforce the picture of a two-speed Chinese economy, with strong exports and factory output offset by weak domestic demand, adding to the case for the accelerated fiscal spending Beijing’s leadership signalled at July’s Politburo meeting. The data suggests deflationary pressure has not been fully resolved despite the earlier boost to producer prices from the Iran conflict and Strait of Hormuz disruption, leaving analysts expecting an M-shaped inflation path through the rest of the year. Continued softness in household demand, tied to the property market slump and job security concerns, points to limited near-term upward pressure on prices, a mildly negative signal for Chinese consumer-facing equities. The lag before fiscal stimulus feeds through, expected around one quarter, means markets are likely to look past near-term inflation weakness toward the pace and scale of implementation over the second half of the year.
Chinese inflation cooled further in July on cheaper oil and weak demand, leaving Beijing’s promised fiscal push to do the heavy lifting on growth over the second half of the year.
Summary:
- China’s consumer price index rose 0.5% year on year in July, a six-month low, while edging down 0.1% month on month
- Core CPI, which excludes food and energy, rose 0.9% year on year, while food prices fell 1.5%
- The producer price index rose 3.5% year on year, easing from 4.1% in June to a three-month low and missing forecasts for a 3.8% rise
- Analysts attributed the softer readings to lower oil prices and weakening domestic demand, adding that oil price trends remain uncertain
- Higher producer prices were driven mainly by the mining and raw materials sectors, while food and daily consumer goods prices declined
- Price shocks from the US-Israel war on Iran and the closure of the Strait of Hormuz had previously lifted producer prices and helped end China’s prolonged deflationary streak
- Factory activity contracted in July in an official survey and slowed to a four-month low in a private-sector survey, with both showing weakening new orders
- China’s leadership signalled stronger fiscal spending at a late-July Politburo meeting, with the effects expected to be felt with roughly a one-quarter lag
China’s producer price inflation eased more than expected in July to its weakest pace in three months, while consumer inflation also cooled, official data showed on Sunday, as global energy prices retreated despite the ongoing US-Israel war against Iran. The National Bureau of Statistics said the consumer price index rose 0.5% year on year in July, a six-month low, edging down 0.1% on a month-on-month basis. Core CPI, which strips out food and energy, rose 0.9% year on year, while food prices fell 1.5%.
The producer price index rose 3.5% year on year, easing from 4.1% in June and coming in below economists’ expectations for a 3.8% increase in a Reuters poll. Higher producer prices were driven mainly by increases in the mining and raw materials sectors, the statistics agency said, while prices for food and daily consumer goods declined. Price shocks stemming from the US-Israeli war on Iran and the closure of the Strait of Hormuz, a key oil and gas passage, had previously lifted producer prices and helped flip China’s years-long deflationary streak, though government efforts to curb fierce price wars in major industrial sectors had achieved only limited effect before this latest easing.
China’s leaders are confronting a two-speed economy of strong factory output and exports alongside weak domestic demand, and have pledged to bolster growth by accelerating fiscal spending on already budgeted infrastructure projects through year-end. One analyst said lower oil prices combined with weakening demand caused both consumer and producer inflation to come in below expectations in July, though oil price trends remain uncertain, meaning their effect on inflation is also likely to stay uncertain. The same analyst noted that economic momentum softened in the second quarter, and that July’s Politburo meeting signalled stronger fiscal spending as the policy response, though the transmission of that spending into demand is expected to take around a quarter to materialise, consistent with a view that inflation will follow an M-shaped path for the rest of the year.
With household demand for goods still subdued by a property market slump and weak job security, economists said deflationary pressures are likely to persist. Factory activity contracted in July according to an official survey and slowed to a four-month low in a private-sector survey, with both showing weakening new orders. China’s top leaders, at their late-July meeting, signalled stronger support for the economy and vowed to continue cracking down on price wars among manufacturers competing for market share at the expense of profits, while pledging to introduce pragmatic new policies in a timely manner and more forcefully expand domestic demand.
The latest inflation figures follow trade data released two days earlier showing exports and imports both surging, boosted by strong overseas demand for AI-related technology products, underscoring the divergence between China’s resilient external trade performance and its more subdued domestic economy.
This article was written by Eamonn Sheridan at investinglive.com.