China's consumer price index (CPI), a major barometer of inflation, rose over 2 percent year-on-year in July, driven by rising pork prices and seasonal factors. The growth of producer price index (PPI) narrowed for the first time in nearly five months. Analysts believe that the CPI lacks the momentum of a significant rebound in the future. Inflation will remain moderate and controllable during the year. The PPI will continue its downward trend, but the downside will be significantly narrowed.
According to data released by the National Bureau of Statistics on August 9, China’s PPI rose 2.1 percent year-on-year in July, up 0.2 percentage points from the previous month. On a monthly basis, the CPI rose by 0.3%, while the number of last month was negative.
Sheng Guoqing, senior statistician of the Urban Statistics Department of the National Bureau of Statistics, explained that the increase in CPI growth was mainly contributed by the rise in non-food prices. Prices of transportation, tourism and accommodation increased remarkably in summer vacations. Meanwhile, transportation fuel prices also increased a lot year-on-year due to the low base and the adjustment of domestic refined oil prices.
It is worth noting that the recent rise in pork prices has become a major driver for raising food prices. Data show that pork prices in July rose by 2.9 percent, an increase of 1.8 percentage points over the previous month.
“The price of pork has increased from the previous month and the year-on-year decline has narrowed. It is expected to gradually usher in the upward cycle. The possibility of a rebound in the third and fourth quarters is likely to lead to a slight increase in food prices,” said Liu Xuezhi, a senior researcher at the Bank of Communications Financial Research Center.
However, he also stressed that the CPI lacks the recovery momentum. Considering tail-raising factors, it will drop significantly after July. The possibility of a sharp rise in inflation in the second half of the year is small. It is expected that the annual CPI will increase by about 2 percent.
In fact, from the perspective of core CPI, it can be found that there is no inflationary pressure. Data show that in July, the core CPI excluding food and energy rose by 1.9 percent, which was unchanged for three consecutive months.
In line with previous market expectations, the PPI shows a downward turning point. According to the NBS, the PPI in July rose by 4.6 percent year-on-year, and the growth rate narrowed by 0.1 percentage points, which was the first time in the past five months.
According to Liu Xuezhi, the price of production materials and the year-on-year growth rate have both declined, which is the main reason for the decline in the growth rate of PPI. It is expected that the PPI in the third quarter may be consolidating at a relatively high level, and it is more likely to fall back in the fourth quarter.
Zhang Jun, chief economist of Morgan Stanley Huaxin Securities, said in an interview with the Shanghai Securities News that the recent macroeconomic regulation and control emphasized that fiscal policies should be more active and maintain ample liquidity, which will help support infrastructure investment and boost demands for raw materials and engineering machinery. Therefore, the extent of the PPI downside in the second half of the year will be significantly narrowed. If the policy adjustment is stronger than expected, the PPI may rebound slightly in some months.
Based on current CPI and PPI status, the overall price is expected to remain at a low inflation level, which will provide a loose operating space for monetary policy.
Translated by Coral Zhong