Lower-than-expected inflation in July leaves the PBOC more policy space, analysts say.
Lower-than-expected Chinese inflation in July will provide more room for monetary easing to support the economy, analysts said, pointing to the prospect that imported price rises could slacken as the global economy slows.
While inflation rose to a two-year high 2.7% y/y in July from June’s 2.5%, price rises were mainly driven by food. Pork prices soared by 20.2% y/y, reversing the previous month’s 6% decline, and adding 0.43 percentage point to overall inflation, according to Wang Qing, chief analyst of Golden Credit Rating. Vegetable prices jumped by 12.9% y/y, up from the previous 3.7% gain, due to hot weather, buoying CPI by 0.17 pp.
July’s inflation was lower than the median analyst forecast of 2.9%, with Wang pointing to easing fuel costs as global oil prices decline as well as moderate increases in non-food prices amid a mild recovery in consumption.
Core CPI, excluding food and energy prices, narrowed by 0.2 pp to 0.8%, Wang noted. This indicates that overall price pressures have receded, leaving room for monetary stimulus to stabilise economic growth, he said.
LESS IMPORTED INFLATION
Imported inflation is also easing as international commodity prices fall under the impact of global slowdown fears and rate hikes by major central banks, wrote Wen Bin, chief economist of China Minsheng Bank Research Institute in a research note.
Producer price inflation eased more than expected, falling for the ninth straight month in July to 4.2% y/y, the lowest since February 2021, and down from June's 6.1%.
Commodities have entered a declining phase, with international prices for crude and non-ferrous metals as well as domestic ferrous metals and coal all experiencing month-on-month declines in July, according to Guo Lei, chief economist at GF Securities.
Weak domestic demand is failing to support industrial product prices, as the government’s infrastructure push fails to completely offset the impact of a real estate downturn, said Wang, noting that prices of rebar, cement, concrete, glass, and other building materials all fell in July. (SEE: MNI: China Needs To Step Harder On Macro Levers To Boost Demand)
Producer prices are set to continue with the downward trend into H2, given the expected fall in commodity prices and a higher comparison base with the same period last year, said Wen.
CPI may rise moderately and could break the government’s 3% ceiling in some months, perhaps September and December, as pork prices enter an upward cycle, Wen continued, though the overall inflationary picture is subdued with annual CPI likely below the ceiling.