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Andrew Mullen

1. Non-food drags CPI down to lowest since February 2021
China’s consumer price index (CPI) stood unchanged from a year earlier in June, down from 0.2 per cent growth in May.
This was below the expected rise of 0.1 per cent, according to the Chinese financial data provider Wind, and was the lowest growth reading since February 2021.
Beijing has set a CPI target of around 3 per cent growth for 2023.
The decline in CPI inflation in June was mostly driven by non-food factors, as food price inflation has shown some signs of stabilising, analysts from Nomura said.


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Within the CPI, food prices increased by 2.3 per cent from a year earlier in June, compared with a rise of 1 per cent growth in May.
Non-food prices, meanwhile, decreased last month, year on year, falling by 0.6 per cent after having remained flat in May.
Prices for pork, a staple on Chinese dinner tables, decreased by 7.2 per cent in June compared with a year earlier, while fruit prices increased by 6.4 per cent and vegetable prices increased by 10.8 per cent.
Food-price inflation picked up, but this was more than offset by a fall in core inflation
Capital Economics
“Food-price inflation picked up, but this was more than offset by a fall in core inflation, from 0.6 per cent year on year to 0.4 per cent, and a decline in fuel price inflation to a 31-month low,” said economists at Capital Economics. “The former reflected slower price rises in travel and other in-person services, which reversed some of their earlier acceleration driven by [China’s] reopening.”
China’s core consumer inflation rate, excluding the volatile prices of food and energy, increased by 0.4 per cent in June compared with a year earlier, down from 0.6 per cent growth in May.
2. Factory-gate prices hit seven-year low
China’s producer price index (PPI) fell by 5.4 per cent in June, year on year, down from a fall of 4.6 per cent in May, to its lowest point since December 2015 after remaining in deflationary territory for the ninth consecutive month.
This was below expectations, with PPI having been expected to fall by 5 per cent last month, according to Wind.
PPI reflects the prices that factories charge wholesalers for products.


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“The decline in PPI inflation in June was largely due to sequential price declines across a wide range of domestic raw materials, despite a lower base carried over from last year compared with May, as the initial effects from the Ukraine crisis started to moderate more meaningfully around this time last year,” said analysts at Nomura.
Factory-gate prices also dropped by 0.8 per cent in month-on-month terms, with economists at Capital Economics pointing to the biggest declines coming in energy, metal and chemical prices, with consumer durable prices also retreating due to weak demand both within and outside China.
3. Deflation? Policy support? What’s next for China’s inflation?
Analysts at Nomura expect CPI inflation to slip further in July to minus 0.5 per cent, year on year, due partly to a high comparison base, even while taking into account a potential rise in service inflation as a result of the summer holiday season.
They expect PPI inflation to rebound moderately to minus 4.5 per cent, year on year, in July, mostly due to a lower base.
“The ultra-low inflation reading lends support to our view that the [People’s Bank of China] is likely to implement two more rounds of policy rate cuts of 10 basis points each, and another 25-basis-point cut to the [reserve requirement ratio] over the rest of the year,” Nomura’s analysts said.
The central bank last cut the reserve requirement ratio – the amount that banks set aside for deposits – by 25 basis points in March.
PPI deflation is likely to ease somewhat in the second half of the year, partly because infrastructure spending should put a floor under commodity prices
Capital Economics
In June, the People’s Bank of China cut the five-year loan prime rate (LPR) – which is a reference rate for mortgages – from 4.3 to 4.2 per cent. The one-year loan prime rate – the medium-term lending benchmark for corporate loans – was also cut from 3.65 to 3.55 per cent. Both key lending rates were last cut in August.
“PPI deflation is likely to ease somewhat in the second half of the year, partly because infrastructure spending should put a floor under commodity prices. And core inflation could rise gradually, as a relatively tight labour market puts greater upward pressure on wages,” said economists at Capital Economics.
“Fuel-price deflation, a key factor behind subdued headline inflation recently, will probably wane over the coming months. As such, we expect headline inflation to rise to around 1 per cent by the end of this year.
“But this would still be soft and won’t constrain the PBOC’s ability to loosen policy further. That said, with credit demand weak, and the currency under pressure, we think the bulk of support will come through fiscal policy. We expect only another 10 basis points of policy rate cuts this year.”

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China’s consumer price index (CPI) remained flat in June, year on year, hitting its lowest growth reading since February 2021
Producer price index (PPI) fell by 5.4 per cent last month, reaching its lowest point since December 2015


China’s consumer price index (CPI) hit its lowest growth reading since February 2021 in June, while the producer price index (PPI) reached its lowest point since December 2015, data released on Monday showed.


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