China Consumer Inflation, Producer Prices Hit by Weak Demand

Consumer and producer price data revealed by China’s National Bureau of Statistics on Wednesday shows the country is still troubled by weak domestic demand.

Consumer prices rose in June for a fifth month but at a level that was below expectations. Meanwhile, producer prices are still undermined by deflation, as support measures have failed to bolster an economic recovery that is yet to really warm up.

Beijing has sought to revive consumption after a stuttering post-Covid recovery, but concerns are lingering over more fundamental issues including a protracted housing downturn and job insecurity. That has dented consumer and industrial activity and reinforced calls for more effective policies.

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The consumer price index (CPI) in June rose 0.2% from a year earlier, against a 0.3% uptick in May, the slowest in three months, the NBS data showed, below a 0.4% increase forecast in a Reuters poll.

“The risk of deflation has not faded in China. Domestic demand remains weak,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, said.

Food, factory-gate prices decline

Food prices fell even more, despite supply disruptions caused by bad summer weather, underlining the soft demand.

Food prices slipped 2.1% year-on-year, compared with a 2% decline in May. Notably, fresh vegetable prices tumbled 7.3% versus a rise of 2.3% in May. A decline in fresh fruit prices deepened to 8.7% from 6.7% in May.

CPI edged down 0.2% month-on-month, versus a 0.1% drop in May and worsening from an expected 0.1% fall.

The producer price index (PPI) fell 0.8% in June from a year earlier, less than a 1.4% decline the previous month, and matched a forecast 0.8% fall.

The fall in the PPI was the smallest in 17 months, mostly attributable to a lower base last year.

“The deepening declines in factory-gate prices of consumer durables underscores that excess manufacturing capacity remains a worsening issue,” said Gabriel Ng, assistant economist at Capital Economics.

“Government policy is still prioritising investment which is set to exacerbate the problem further. This will continue to weigh on inflation,” said Ng, who estimated full-year CPI would rise just 0.5%, well below an official inflation target of 3% for 2024.

Yuan at 8-month low

Chinese shares were subdued and the yuan slipped to nearly eight-month lows after the data.

China’s retailers have discounted goods from cars to coffee as they navigate through sluggish consumer spending amid a shaky economic outlook.

A slide in gasoline prices accelerated to 6% in June from 5.2% the previous month, while new energy vehicle prices fell 7.4% against a 6.9% decline in May, NBS data showed.

“Incorporating soft Q2 inflation prints lowers our full-year 2024 forecast for headline PPI inflation to -1.6%,” from a 1.1% decline previously, Goldman Sachs said in a note, while maintaining its CPI forecast below consensus at 0.4%.

Policymakers’ repeated calls for average folks to “dare to spend” have drawn a lukewarm response. With households and companies expected to borrow less, that strengthens the case for policy support other than the piecemeal subsidies for auto and consumer goods trade-ins.

An overhaul of the consumption tax as part of long-touted changes to China’s tax system might be announced at a key leadership gathering next week, which may shift incentives for local officials from growing their manufacturing base to expanding their consumer base.

“Soft inflation and weak credit data are presenting a compelling case for further monetary policy easing from China’s central bank in the coming months,” Lynn Song, chief economist for Greater China at ING, said.

Core inflation, excluding volatile food and energy prices, stood at 0.6% in June, unchanged from May.