China’s Inflation Eases Amid Weak Domestic Demand
China’s producer price inflation moderated more than anticipated in July, reaching its lowest level in three months. Concurrently, consumer inflation also showed signs of cooling, according to official data released on Sunday. This trend occurred against the backdrop of declining global energy prices, despite the ongoing US-Israel conflict with Iran. China’s leaders are facing a dual-speed economy characterised by robust factory output and exports alongside subdued domestic demand. In response, they have committed to enhancing growth by expediting fiscal spending on pre-approved infrastructure projects thru the end of the year. “Lower oil prices, combined with weakening demand, caused both (consumer and producer price inflation) in July to come in below expectations. Oil price trends remain uncertain, meaning their impact on inflation is also likely to be uncertain,” said Zhaopeng Xing. “On the demand side, the effect of faster fiscal spending in the second half of the year is likely to be felt with a lag of about one quarter. We maintain our view that inflation will follow an M-shaped trajectory this year.”
The producer price index increased by 3.5 percent year-over-year in July, according to data from the National Bureau of Statistics, marking a decline from 4.1 percent in June and reaching its lowest level in three months. It was below the expectations of economists for a 3.8 percent increase in a poll. The core consumer price index, excluding the volatile costs associated with food and energy, increased by 0.9 percent year-on-year, while food prices experienced a decline of 1.5 percent. From the previous month, CPI decreased by 0.1 percent, contrasting with an anticipated increase of 0.2 percent and following a decline of 0.3 percent in June. Zhiwei Zhang noted that the deceleration in inflation aligns with other economic indicators, including the PMI reading. “The economic momentum softened in Q2,” Zhang said. “The Politburo in July signalled stronger fiscal spending as the policy response. The transmission of the fiscal spending will take time.” ANZ anticipates a full-year Producer Price Index of 2.5 percent and a Consumer Price Index of 1.0 percent.
Although certain segments of China’s upstream and high-tech industries have exhibited robust profit growth, further analysis is warranted. Domestic market-facing manufacturers faced challenges due to sluggish demand as overall economic growth decelerated. Increasing input costs pose a threat to profit margins and may undermine confidence. Increases in the mining and raw materials sectors were the primary contributors to the rise in producer prices, according to the statistics agency. In contrast, there was a decrease in prices for food and everyday consumer goods. Price shocks resulting from the US-Israeli conflict with Iran and the closure of the Strait of Hormuz, a crucial passage for oil and gas, have elevated producer prices and contributed to a reversal of China’s prolonged deflationary trend. Government initiatives aimed at mitigating intense price competition in key industrial sectors and stabilising prices have, until now, yielded only modest results.
With household demand for goods still subdued by a property market slump and low job security, deflationary pressures likely remain, according to economists. Factory activity contracted in July according to an official survey and slowed to a four-month low in a private-sector survey, with both data sets indicating a decline in new orders. China’s top leaders, during a pivotal meeting in late July, indicated a commitment to bolstering the economy and pledged to persist in their efforts to curb competition-driven price wars among manufacturers that prioritise market share over profitability. They also pledged to introduce pragmatic and effective new policies in a timely manner, and more forcefully expand domestic demand and improve supply.
