MNI REALITY CHECK: China July CPI May Slow On Base Effects

China's consumer price index is set to edge lower in July, decelerating further from the slowdown in June due to the year ago base comparisons, with a moderate rise in non-food prices unlikely to offset declining food prices, industry analysts told MNI.

"CPI may further slow to 0.6% y/y from June's 1.1% gain," said Wang Jingwen, a senior researcher at the Pangoal Institution, pointing to the high base last July when the month-on-month CPI turned positive for the first time since the initial outbreak of Covid-19.

CPI may be flat in July on a monthly basis, Wang added.

VEGETABLE PRICES

Wang noted that the price index of edible agricultural products tracked by the Ministry of Commerce fell 1.5% m/m in July, the smallest decline since February. The narrowing decline in food prices could be partly attributed to rising vegetable prices which rose by 0.6% from June, the first uptick since February, mainly due to extreme weather, according to Wang.

The floods in Hehan province, a major agricultural production center, pushed up vegetable prices in mid-to-late July, but the prices in wholesale markets there fell back quickly due to adequate stock levels, according to a staff member at the Shangqiu Agricultural Products Center in Henan.

Vegetable prices remained stable in July, with many varieties inching up around CNY0.2-0.4 per kilo throughout the month, the staff member said, though noting that the prices of onions and potatoes started to pick up since end-July when newly reported local Covid cases triggered stricter anti-pandemic measures, affecting transportation. "Trucks carrying vegetables found it harder to get off highways," the source said.

PORK PRICES

Pork prices, the main CPI driver through 2020, started to recover in July after months of continuous decline. Most top-weight live hogs were released for slaughter in June and the government stepped in to boost state reserves, helping to ease oversupply in the market, said Lin Guofa, chief research officer at BRIC, an agricultural consulting firm with data covering over 200 countries.

The average wholesale swine carcass prices was CNY21.55 per kilo in July, up 7.8% m/m but still down 56.3% y/y, Lin noted. While that of live hogs was CNY15.82 per kilo, rising 7.5% m/m or falling 57.4% y/y.

Lin expected the pork prices rebound will only be temporary, with supply and demand likely to restore balance in Q4, pushing pork prices down into the CNY14-20 per kilo range, said Lin, adding that this won't drive up CPI largely as pork prices would still be significantly lower than that in the same period last year.

NON-FOOD PRICES

Except for the monthly decline in summer clothing prices, rental prices as well as education, culture and entertainment costs all rose during the summer vacation season, said Wang. Transportation fees were driven up by holiday travel demand, he added.

The government hiked domestic gasoline and diesel prices before lowering them in end-July, leading to a total reduction of CNY30 per ton respectively. This resulted in a fall of about CNY1.5 to fill a 50-liter fuel tank with unleaded fuel for private car owners, according to staff at Sinopec.

The median of analysts' expectation for July CPI polled by Bloomberg was +0.8% y/y, down from the 1.1% increase seen in June.