China experiences its first decline in consumer prices in two years, prompting concerns about the possibility of deflation.

 

China's central bank has countered deflation concerns and expressed its anticipation of a rebound in consumer prices following a decline in July.

China released its inflation data for July, indicating a moderate improvement compared to June.

In July, the consumer price index (CPI) declined by 0.3% year-on-year but rose by 0.2% when compared to June, as reported by the National Bureau of Statistics on Wednesday.

The year-on-year CPI figure for July was slightly more favorable than the anticipated 0.4% decline, according to analysts surveyed by Reuters. Nonetheless, it marked the first year-on-year decrease since early 2021, as per official data accessed via Wind Information.

Conversely, the producer price index (PPI) dropped by 4.4% in July on a year-on-year basis, showing improvement from the 5.4% decrease observed in June, as per the data.

However, the year-on-year PPI reading was worse than the 4.1% forecast projected by a Reuters poll.

Zhiwei Zhang, President and Chief Economist of Pinpoint Asset Management, commented on the data release, stating, "Both CPI and PPI are in deflation territory. The economic momentum continues to weaken due to lackluster domestic demand."

He further added, "The CPI deflation may put more pressure on the government to consider additional fiscal stimulus to mitigate the challenge."

A 26% year-on-year decrease in pork prices, a crucial staple in China's diet, played a role in the overall decline of the Consumer Price Index (CPI) in July. Meanwhile, tourism prices witnessed a 13.1% increase compared to the previous year.

Core CPI, which excludes food and energy prices, exhibited a rise of 0.8% year-on-year — the highest since January, based on official data sourced from Wind Information.

According to Bruce Pang, Chief Economist and Head of Research for Greater China at JLL, producer prices are likely to experience a year-on-year increase before the consumer price index does. He anticipates that consumer prices will continue to be influenced downwards in the upcoming months due to declining pork prices and a significant base effect, while core CPI could gradually ascend.

Lackluster domestic demand has persisted since the onset of the pandemic. China's consumer price index remained unchanged in June compared to the previous year. Second-quarter data prompted several economists to caution against the increasing risk of deflation, characterized by a continuous decrease in prices over time.

Officially, China's central bank has resisted such concerns, asserting its expectation of a resurgence in consumer prices after a dip in July.

Oxford Economics predicts China's consumer price index to exhibit a 0.5% growth this year, while the producer price index is projected to decline by 3.5%.

Louise Loo, Lead Economist at Oxford Economics, explained that China's subdued demand in Q2 can be attributed to its relatively controlled demand-side stimulus during the pandemic, along with years of regulatory tightening and an ongoing correction in the housing sector.

Loo noted that the focus on targeted easing by authorities rather than broad-scale stimulus is a "positive development."

China reported trade data on Tuesday, revealing a significant drop in both foreign and domestic demand. Exports witnessed a 14.5% decline in July compared to the previous year, while imports fell by 12.4% in U.S. dollar terms — both figures worse than analysts had anticipated.

The sharp decrease in import figures was partly influenced by declining commodity prices, yet Loo's estimates suggest that imports decreased in real volume terms by approximately 0.4%.

China is slated to release retail sales, industrial production, and other data for July on August 15th.