Producer prices fall in China

China’s producer prices continued to decline for the ninth consecutive month in June, while consumer prices remained unchanged, according to official data released on Monday. These figures highlight the challenges faced by the world’s second-largest economy in stimulating demand and revitalising growth.

The inflation data fell short of market expectations, indicating that China may need stronger policy support to sustain its recovery from the strict “zero-Covid” restrictions imposed last year.

Hong Hao, Chief Economist at Grow Investment Group, stated that the consumer part of the inflation equation was entering a deflationary zone, and the government was still deliberating on the best ways to support the economy. He added that although economic numbers in the second quarter would be stronger due to a lower base, an immediate rescue for the economy was unlikely.

China’s National Bureau of Statistics reported that producer prices fell by 5.4% in June compared to the previous year and decreased by 0.8% from the previous month. These figures were weaker than expected, with another poll forecasting a 5.0% annual decline. The decline in June marked the ninth consecutive drop and the sharpest decline since December 2015.

An economist at Capital Economics attributed the weak producer prices partly to a higher base for comparison, as global commodity prices surged a year ago following the Ukraine crisis. Huang expects the deflation in producer prices to ease in the second half of the year, driven by infrastructure spending, which should stabilise commodity prices.

In terms of consumer prices, annual inflation remained flat in June, primarily due to a 7.2% drop in pork prices. This result fell short of expectations for a 0.2% increase. Monthly consumer price inflation in June also disappointed, with a decline of 0.2%, marking the fifth consecutive fall.

Core inflation, which excludes food and energy costs, stood at 0.4% in June compared to 0.6% in May.

Analysts predict that fuel price deflation, a factor contributing to subdued headline inflation, will likely diminish in the coming months. Consequently, headline inflation is expected to rise to around 1% by the end of the year, although it would still remain soft and not constrain the People’s Bank of China’s ability to implement further policy loosening.

Market expectations for additional policy measures are likely to increase following China’s weak price data. The Communist Party’s top brass will review the country’s economic performance in the first half of the year during a Politburo meeting later this month. China’s second-quarter economic growth data, along with various other economic indicators, will be released on July 17.

Chinese Premier Li Qiang recently held a symposium on the economic situation and pledged to introduce targeted and coordinated policy measures to stabilise growth, ensure employment, and mitigate risks. The State Council has also committed to implementing “more forceful measures” to enhance economic development and promote sustained recovery, although specific details have yet to be provided, except for stimulus measures announced for the electric car industry.

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