China reaction: CPI inflation moderates as PPI narrows its fall

Consumer prices softened, underscoring the weak demand

China's Consumer Price Index (CPI) inflation eased to 0.2% yoy in June, down from 0.3% in May, and below expectations (BBG: 0.4%; AXA IM: 0.3%). On a monthly basis, headline CPI marked a second month of decline, printing at -0.2% mom in June, from -0.1% in May. Pork prices continued their strong recovery, rising by 11.4% mom and 18.1% yoy, while other fresh food items such as vegetables and fruit saw significant price declines of 7.3% and 3.8% mom respectively, more than seasonal norms and 7.3% and 8.7% yoy. Overall, food prices fell by 0.6% mom and 2.1% yoy in June.

Core CPI inflation, excluding food and energy, remained stable at 0.6% yoy, -0.1% mom in June. Prices of automobiles and home appliances showed no signs of recovery, dropping by 5.3% and 1.3% yoy in June. Service prices were unchanged on a monthly basis in June, yet weakened to 0.7% yoy from 0.8% in May.

June saw softer price prints across the board compared to May, both on a monthly and annual basis. The surge in pork prices was insufficient to offset the declines in other fresh food prices. China's Bureau of Statistics attributed the fall in fresh food prices to seasonal fluctuations amid supply surges. The price decline in durable goods was seen as a delayed effect of the ‘618’ e-commerce promotions - a ‘Black Friday’-like e-commerce shopping festival on 18 June in China (Hence ‘618’).

June’s CPI figures signal weak domestic demand, echoing softer PMIs in June. Supply-side factors have primarily driven reflation this year, notably in the recovery of pork prices and upstream PPIs. However, demand-side support for reflation has been largely absent. Weak demand, reinforced by soft price momentum, could lead to negative price expectations in the future, potentially forming a deflation trap—evident in recent auto price trends.

PPI deflation improved further

China’s Producer Price Index (PPI) deflation continued to narrow in June. Headline PPI eased to -0.8% yoy, from a 1.4% decline in May. Producer goods PPI decreased by 0.8% yoy from -1.6% in May, while consumer goods PPI remained unchanged at -0.8% yoy in June. Upstream industrial material prices continued to improve, with mining prices increasing by 2.7% yoy and 0.3% mom in June. Non-ferrous metal prices rose 17.0% yoy and 3.8% mom, while ferrous metal prices dipped by 2.3% yoy and 0.5% mom, amid weather disruptions. Downstream sectors showed struggles with weak consumer demand, with PPI for durable consumer goods recording a monthly decline of 0.7% (2.1% yoy) in June.

As expected, PPI inflation continued to narrow its decline in June. However, downstream sectors appear to struggle with weak consumer demand. If demand-side policy remains inadequate and soft demand continues into the second half of the year, we would expect the pace of recovery in factory prices for consumer goods to slow, weighing on headline PPI inflation.

July sees major economic planning events

The long-anticipated 3rd Plenum meeting, delayed since October last year, will take place in Beijing from 15 to 18 July. Although expectations have been building, we do not foresee any major announcements focused on short-term development. Instead, the meeting is likely to emphasize long-term and structural development, with a focus on the industrial chain, future industrial growth, and promoting technological innovation. This aligns with efforts to enhance the so-called ‘new quality productive forces.’

Late July will also see the monthly Politburo meeting. Following the release of Q2 GDP figures next Monday, policymakers will convene to evaluate the current economic situation and adjust the policy agenda accordingly for the second half of the year. Outcomes from this meeting are likely to have a more immediate impact. Given that the economy is currently on track to achieve this year’s 5% growth target, we do not expect significant policy strengthening or a major policy shift at this time.