China’s inflation rises sharply in July

(Bloomberg) – China consumer inflation accelerated and factory price deflation eased in July, as the nation’s economy continued to recover from the coronavirus crisis amid disruption from regional flooding.

The consumer price index rose 2.7% last month from a year earlier, following a 2.5% gain in June, the National Bureau of Statistics said Monday. The median forecast was for a 2.6% increase.
The producer price index registered a 2.4% decline on year, compared to a projected 2.5% decrease and the 3% drop in June

Key Insights
Food prices were pushed higher in the month partly due to damage and transportation disruptions caused by floods in central and southern China.

Core inflation, which removes the more volatile food and energy prices, was 0.5% year-on-year, compared with 0.9% in June. That’s the weakest reading since 2010.

The slowdown in factory deflation, mainly due to higher commodity and industrial product prices, is better news for corporate profits and companies’ capability to expand investment.

The credit boom has “failed to boost core inflation” as prices of most services are declining due to ongoing anti-virus measures across the nation, said Xing Zhaopeng, an economist at Australia and New Zealand Banking Group Ltd in Shanghai.

China’s economy is continuing its gradual recovery into the second half of the year, driven by production resumptions and the release of pent-up demand. But whether that momentum can be sustained depends at least in part on how fast demand can catch up with production and how China copes with uncertainties including Sino-U.S. tensions and new virus outbreaks.

What Bloomberg’s Economists Say..

“The acceleration in China’s consumer price inflation is likely to be short-lived, despite its pickup in July. Food price inflation would probably soften toward year-end, which, together with still-sluggish household demand, could exert downward pressure to the headline CPI. We expect the pace of decline in producer prices to continue to narrow, but remain in deflation over the course of the year.”

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Pork prices, a key element in the country’s CPI basket, rose 85.7% on year, 10.3% on month. A previous disease outbreak has driven pork prices over the past year.

“The moderation in core CPI was mainly due to tourist package prices — we usually see a price increase in July due to the holiday season, whereas prices declined by 1.5% month-on-month last month,” said Michelle Lam, greater China economist at Societe Generale in Hong Kong. “The moderation reflects broader weakness in the consumer service sector, which would recover only gradually due to Covid-19.”

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