Recent economic data from China 'may prove insufficient for sustainable reflation'

Investing.com -- Recent economic indicators from China have provided a mixed picture, with inflation readings for July beating expectations, but analysts at Citi Research suggest these improvements may not be sufficient for sustainable reflation.

Inflation data overview

China's Consumer Price Index (CPI) and Producer Price Index (PPI) for July showed slight improvements over forecasts. CPI rose 0.5% YoY, surpassing expectations (Citi/Mkt: 0.4/0.3% YoY) and reaching the highest level since April 2023, excluding Chinese New Year months. 

“The headline number could seemingly offer some relief for China’s soft domestic demand, yet the breakdown appears less encouraging,” the analysts said.

Sequentially, CPI increased 0.5% MoM, reflecting a high reading if CNY months are excluded. Despite this, the breakdown reveals less favorable trends:

• Food prices: Increased by 1.2% MoM, reversing a 12-month negative trend. Pork prices surged 20.4% YoY, contributing significantly to the CPI increase. However, other food items like beef and fruit remained stable or declined.

• Energy prices: Largely stable, with fuel prices for housing unchanged and transportation fuel prices slightly reduced from the previous month. Domestic oil prices are expected to follow global trends downwards.

• Core inflation: Fell to 0.4% YoY, its lowest level since early 2021, despite a sequential rise of 0.3% MoM. Seasonal service price hikes were not sufficient to boost the year-on-year change, and core goods inflation dipped into negative territory.

The Producer Price Index (PPI) also beat expectations, remaining at -0.8% YoY (Citi/Mkt: -1.1/-0.9% YoY) with a sequential change of -0.2% MoM. However, the small beat might be short-lived due to expected commodity price softening into August. Key sectoral performances include:

• Upstream sectors: Benefited from oil price changes, with oil and gas extraction prices rising 3.0% MoM. Nonetheless, ongoing property issues and extreme weather have negatively impacted ferrous metal and non-mineral mining prices.

• Downstream sectors: Showed limited improvement, with auto manufacturing PPI rising slightly, driven by internal combustion engine vehicles, while new energy vehicles continued to see price declines. Prices for lithium batteries and PCs also saw negative sequential changes.

Outlook 

Despite the small beats in inflation data, Citi Research argues that these figures may not adequately address persistent deflationary pressures. Supply-side factors, such as food price fluctuations and seasonal travel demand, have driven recent CPI improvements, but core inflation remains weak and PPI faces ongoing challenges from overcapacity and insufficient demand.

Citi maintains its annual inflation forecasts at 0.6% YoY for CPI and -1.4% YoY for PPI, with a negative GDP deflator expected for the year.