Consumer Prices in China Rise Amid Weak Domestic Demand

BEIJING (Reuters) – China’s consumer prices rose at a slightly faster-than-expected rate in July, partly due to weather disruptions affecting food supplies. However, producer deflation persisted, indicating ongoing softness in the country’s consumption trends, presenting a challenge for policymakers.

The frail consumer sector has been a major concern for Beijing, as weak domestic demand hampers the world’s second-largest economy while manufacturing activity continues to decline.

Key Statistics

• The consumer price index (CPI) increased to a five-month high of 0.5% year-on-year in July, compared to 0.2% in June, according to the National Bureau of Statistics (NBS). This figure surpassed the 0.3% increase predicted in a Reuters poll of economists.
• Month-on-month, the CPI rose by 0.5%, contrasting with a 0.2% drop in June and a forecasted 0.3% increase.

High temperatures and rainfall in certain regions last month contributed to a rise in food prices, leading to the monthly growth, as mentioned by NBS statistician Dong Lijuan. Food prices shifted from a 2.1% year-on-year decline in June to steady figures in July, while non-food price growth slowed from 0.8% in June to 0.7% last month.

“There’s a sharp contrast between food and ex-food CPI… none of the other goods and services saw inflationary moves, suggesting no sign of a pickup in domestic demand,” stated Xu Tianchen, senior economist at the Economist Intelligence Unit.

Core inflation, excluding volatile food and fuel prices, grew 0.4% year-on-year in July, down from 0.6% in June.

Weak domestic demand is a significant challenge for the economy. Hopes for an export-led recovery are hindered by increasing trade tensions with the West, tariffs on Chinese goods, and concerns about a potential U.S. recession.

Consumers have largely ignored incentives aimed at reviving consumption due to a prolonged housing downturn, job insecurity, and high levels of local government debt that restrict their ability to purchase big-ticket items.

Car sales, which are the largest component of China’s retail sales, fell for the fourth consecutive month in July, despite a national trade-in program and relaxed auto loan conditions.

Regional Sales Performance

• In June, retail sales in Beijing dropped 6.3%, while Shanghai saw a 9.4% fall, contrasting with a national rise of 2%, according to official data.

The producer price index (PPI) was down 0.8% in July compared to last year, matching the previous month’s figures and remaining above the anticipated 0.9% decline.

Chinese leaders vowed at the end of July that stimulus measures necessary to achieve this year’s economic growth target will be consumer-focused. They recently announced the allocation of 300 billion yuan ($41.96 billion) in ultra-long treasury bonds to support equipment upgrades and consumer goods trade-ins.

($1 = 7.1502 yuan)