China’s weak consumer inflation points to ‘very limited’ domestic demand recovery

China’s consumer-price growth marginally fell short of expectations in June, continuing more than a year of weakness, but analysts have still predicted a faster recovery in the coming months as demand for residential services improves.

China’s consumer price index (CPI), a key gauge of inflation, grew by 0.2 per cent year on year in June, compared to an increase of 0.3 per cent in May, the National Bureau of Statistics (NBS) said on Wednesday.

The reading fell short of the expected 0.41 per cent growth projected by economists polled by Chinese financial data provider Wind.

Meanwhile, China’s producer price index (PPI) – which measures the cost of goods at the factory gate – slipped by 0.8 per cent last month, falling for the 21st consecutive month, having also dropped by 1.4 per cent in May.

The reading performed better than the expected 0.82 per cent decrease projected by Wind.

Elsewhere, China’s core inflation, which excludes volatile food and energy prices, rose by 0.6 per cent last month compared with a year earlier.

On a month-on-month basis, China’s CPI in June remained negative after falling by 0.2 per cent following a 0.1 per cent decrease in May, according to the NBS.

Amid an overall economic slowdown, consumers in China are unwilling to spend due to a prolonged property slump and a bleak job market, with the CPI having stagnated around zero since April last year.

“China’s weak CPI data shows that the domestic demand recovery is very limited. While the core CPI remains stable, the current price changes are too minimal to help lift sentiment,” said Gary Ng, senior economist at Natixis Corporate and Investment Bank.

“To achieve the 5 per cent [annual GDP] growth target, the government will need to consider more countercyclical and demand-side policies than only supporting supply. The challenge is especially tough for the manufacturing sector with overcapacity risks.”

The world’s second-largest economy is experiencing its longest period of deflationary pressure since the 2009 global financial crisis, fuelling market concerns about whether Beijing can meet its 3 per cent annual CPI growth target.

“In June, the consumer market was generally well supplied, with the national CPI falling seasonally yet continuing to rise year on year,” said chief NBS statistician Dong Lijuan.

“Due to fluctuations in international commodity prices and insufficient domestic demand for some industrial goods, the national PPI declined in June compared with a year prior, though the rate of decline continued to narrow.”

Several of China’s public utility companies have increased the price of some services, including water, electricity and gas, amid rising cost pressures and tightened finances.

However, the increased prices have a relatively limited impact on overall consumer prices as they constitute only about 5 per cent of the CPI, according to the Bank of China’s third-quarter economic outlook report released at the end of June.

Economists at the Bank of China expect consumer prices to rise by 0.7 per cent in the third quarter and 1.4 per cent in the fourth quarter, with annual growth averaging at 0.6 per cent.

“The upcoming summer holiday, Mid-Autumn Festival and National Day holidays are bright spots for tourism consumption, residents’ spending willingness on tourism, education and other services has increased, and service-consumption prices will remain on the upwards trajectory,” they said.

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