Chinese CPI inflation contracts in July, PPI falls more than expected

Investing.com -- Chinese consumer inflation shrank in July, indicating that local liquidity and spending remained weak amid slowing business activity, while a decline in factory gate inflation also continued through the month.

Consumer price index (CPI) inflation fell 0.3% in the 12 months to July, slightly better than expectations for a drop of 0.4%, data from the National Bureau of Statistics showed on Wednesday. This came after a flat reading for June, and marks the first annual contraction in CPI since September 2021.

CPI inflation rose 0.2% from the prior month, slightly beating out expectations for growth of 0.1%.

While the monthly reading suggests mild improvement in consumer inflation, a contraction in the annual reading suggests that the trends driving down Chinese inflation - sluggish spending and slowing economic activity- are still actively in play.

It also indicates that the world’s second-largest economy showed little signs of improvement after a dismal second quarter.

A bulk of this weakness stems from a slowdown in China’s manufacturing sector, with a continued contraction in producer price index (PPI) inflation pointing to little improvement in the sector.

PPI inflation shrank 4.4% in July, more than expectations for a drop of 4.1%. While the reading did show some improvement from the 5.4% decline in June, it still remained close to its worst levels since the yuan crisis of 2016.

The weak inflation data comes after data on Tuesday showed that Chinese exports and imports deteriorated further in July. Growth in Chinese business activity also worsened through the month, data from last week showed.

The weak economic trends are likely to attract more stimulus measures from Beijing, as the government moves to shore up a post-COVID economic recovery. But Chinese officials have so far offered scant details on how they plan to shore up the economy.

Worsening inflation may also attract more liquidity measures from the People’s Bank of China, with state media reports suggesting that the bank will have to further cut mortgage and deposit rates to support the economy.