Analysts at Nomura pointed to the high base from last year as the main driver for the negative CPI reading.

2. Volatile commodity prices drive PPI

The producer price index (PPI), which reflects the prices that factories charge wholesalers for products, fell by 4.4 per cent in July, year on year, narrowing from the fall of 5.4 per cent in June.

This was in line with expectations by Wind, marking the 10th consecutive month of contraction.

PPI inflation showed a slight rebound in July, said analysts at Nomura, after declining for six consecutive months.

“As usual, the main driver was commodity prices, which, due to their volatility, have an outsized impact on headline PPI,” said analysts at Capital Economics.

“In particular, higher oil and gas prices meant PPI declined only 0.2 per cent, month on month, last month, compared with an 0.8 per cent fall in June.

“But what stands out most to us is the slight rise in the output prices of consumer durables, following six months of declines.”

3. Core inflation hits highest level since January

China’s core consumer inflation rate, excluding the volatile prices of food and energy, rose by 0.8 per cent in July compared with a year earlier, up from 0.4 per cent growth in June to its highest level since January and broadly in line with its 2022 average.

Core inflation is, according to Capital Economics, a better guide to underlying price pressures.

“Core goods inflation picked up but, at just 0.4 per cent year on year last month, remains well below where it started the year. In contrast, services inflation hit a 17-month high of 1.2 per cent in July,” said analysts at Capital Economics.

4. China not on the brink of a deflationary spiral

Despite CPI joining PPI in deflationary territory in July, analysts said the worst may actually be over for China, with doubts that both will still be in deflationary territory by the end of the year.

“Core inflation suggests that underlying inflation is low but still positive. And we think it may pick up somewhat in the coming months as policy support results in a slight reacceleration in economic growth,” said analysts at Capital Economics.

“The base effects currently weighing on food inflation and producer price inflation will also turn more favourable before long. Low inflation is still a concern, but China doesn’t appear to be on the brink of a deflationary spiral.”

Analysts at Nomura expect CPI inflation to increase moderately to minus 0.1 per cent, year on year, in August due to high-frequency data showing that services price inflation remained robust in the summer season and that some food prices will start to rebound in August.

They also expect PPI inflation to rebound further to minus 3.2 per cent, year on year, in August largely due to a still-low base and the recent rebound in some global commodity prices.

“Since July, we have been noticing some improvements in high-frequency industrial production indicators, and that somewhat contributed to the month-on-month rise in CPI. That said, there won’t be much room for inflation to come up,” said Xu Tianchen, an economist with the Economist Intelligence Unit.

“The deleveraging among housing developers and some local governments are exerting downward pressure on prices through lower demand.”

China bets on better policy enforcement to save economy, vows more help coming

Beijing has rolled out various policies and plans in recent weeks to shore up the slowing economy, but analysts have argued that reforms and more support is required, including an increase in public spending; interest rate and tax cuts; as well as a more well-rounded social security net to promote consumption.

“The economic momentum continues to weaken due to lacklustre domestic demand. It is not clear at this stage if the policies announced recently can turn around the economic momentum soon,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.

“The CPI deflation may put more pressure on the government to consider additional fiscal stimulus to mitigate the challenge.”