July CPI surprises to the upside

Consumer prices grew at their fastest rate in five months in July.

Per data released by the stats bureau (NBS) on Friday:

• The consumer price index (CPI) grew by 0.5% y/y in July, up from 0.2% the previous month
• The producer price index (PPI) fell 0.8% y/y, the same as June’s decline

Two key factors weighing down CPI – food and consumer durables – improved in July.

• Food prices were flat, ending 12 months of decline.
• The price of consumer goods rose 0.5% y/y, the first increase in 15 months.

Month-on-month, CPI grew by a punchy 0.5%.

• But this was mainly driven by food prices, which grew 1.2% m/m.
• Core CPI – which strips out food and energy prices – only grew 0.3% m/m.

Beijing will be pleased that the decline in PPI didn’t speed up.

• Factory gate prices have fallen for 22 consecutive months, but there are signs that PPI is bottoming out.

Get smart: July’s inflation data may signal the beginning of a cyclical price recovery.

• Prices of consumer goods are finally growing, and the deflationary food price cycle has come to an end.
• Meanwhile, PPI deflation is slowing, and upstream prices will modestly recover throughout H2.

Get real: A half-percent increase in CPI is still dangerously close to deflationary territory.

• With exports likely to slow and consumer demand still sluggish, China isn’t out of the deflationary woods.