China’s inflation slows sharply in July, missing forecasts

China's consumer and factory-gate inflation both cooled more than expected in July, underscoring persistent weakness in domestic demand even as Beijing prepares to ramp up fiscal spending in the second half of the year.

The consumer price index rose 0.5% year-on-year in July, down from 1.0% in June and well below the 0.8% increase forecast in a Bloomberg survey, the National Bureau of Statistics reported on Sunday. It marked the slowest pace of consumer inflation since January. On a monthly basis, CPI fell 0.1%, compared with expectations for a 0.2% gain.reuters+3

The producer price index climbed 3.5% from a year earlier, easing from a near four-year high of 4.1% in June and missing the 3.8% consensus forecast in a Reuters poll. It was the weakest factory-gate reading in three months.theedgemarkets+1

Energy and Food Drag Prices Lower

NBS statistician Dong Lijuan attributed the CPI slowdown largely to a sharp deceleration in gasoline price gains. "Gasoline prices were 1.0% higher than a year earlier, compared with a 17.0% increase in June," Dong said, noting this reduced the upward contribution to overall CPI by about 0.45 percentage points. Food prices fell 1.5% year-on-year, with pork prices down 13.3%. Core CPI, excluding food and energy, rose 0.9%, easing from 1.0% in June.chinadaily+1

On the producer side, retreating global energy prices weighed on the index despite ongoing U.S.-Iran tensions and earlier disruptions to the Strait of Hormuz. The PPI fell 0.7% month-on-month in July, steeper than June's 0.3% decline.theedgemarkets+1

Two-Speed Economy Tests Beijing's Stimulus Plans

The data reinforced the picture of a two-speed economy, with resilient exports and factory output offset by sluggish household spending tied to the property market slump and weak job security. Factory activity contracted in July in an official survey and slowed to a four-month low in a private-sector reading, with both showing weakening new orders.straitstimes+1

"Economic momentum softened in Q2," wrote Zhiwei Zhang, chief economist at Pinpoint Asset Management. "The Politburo in July signalled stronger fiscal spending as the policy response. The transmission of the fiscal spending will take time."theedgemarkets+1

Zhaopeng Xing, ANZ's senior China strategist, said lower oil prices combined with weakening demand drove both inflation readings below expectations. "We maintain our view that inflation will follow an M-shaped trajectory this year," Xing said, noting the effects of accelerated fiscal spending would likely be felt with a lag of about one quarter.theedgemarkets