China’s consumer prices rose for a fifth month in June but missed expectations, while producer prices continued to decline amid slow economic recovery efforts.
Beijing aims to boost consumption post-COVID, yet faces challenges like housing downturn and job insecurity, necessitating effective policy responses.
June’s consumer price index (CPI) increased by 0.2% year-on-year, slowing from May’s 0.3%, below expectations.
“The risk of deflation in China has not decreased. Domestic demand is still sluggish,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
Despite supply disruptions from adverse summer weather, food prices further decreased, highlighting weak demand.
Food prices fell 2.1% year-on-year, down from a 2% decline in May. Particularly, fresh vegetable prices dropped 7.3%, contrasting with a 2.3% increase in May, while fresh fruit prices declined further to 8.7% from May’s 6.7%.
The CPI decreased by 0.2% from the previous month, compared to a 0.1% decline in May, exceeding expectations.
In June, the producer price index (PPI) dropped by 0.8% year-over-year, showing improvement from May’s 1.4% decrease and meeting expectations.
The PPI decline, the least in 17 months, was mainly due to a lower comparison base from the previous 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 continues to prioritise investment, exacerbating the problem. This will continue to impact on inflation,” said Ng, who anticipated that the full-year CPI will climb by only 0.5%, significantly below the stated inflation target of 3% for 2024.
Following the data release, Chinese stocks remained calm, while the yuan declined to its lowest point in eight months.
Chinese retailers slashed prices on cars to coffee amid slow consumer spending amidst economic uncertainty.
Gasoline prices dropped faster to 6% in June, up from 5.2% in May, and new energy vehicle costs fell 7.4%, compared to May’s 6.9% decrease (NBS data).
“Incorporating soft Q2 inflation prints lowers our full-year 2024 forecast for headline PPI inflation to -1.6%,” from a previous 1.1% decrease, Goldman Sachs said in a note, while keeping its CPI forecast below consensus at 0.4%.
Policymakers urge spending, but response is tepid. As borrowing declines, broader policy support beyond subsidies is increasingly justified.
China may announce a new consumption tax at an upcoming leadership meeting, shifting focus from manufacturing to consumer growth incentives.
“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,” said Lynn Song, chief economist for Greater China at ING.
In June, core inflation, which excludes volatile food and energy prices, remained stable at 0.6%, matching May’s figure.
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