China’s Inflation Rises Unexpectedly, Fueled by Pork Price Surge
China’s consumer prices rose by a more-than-expected 0.5% in July from a year ago, boosted by a significant increase in pork prices, according to data released by the National Bureau of Statistics on Friday. This marks the highest inflation rate since February, when the Lunar New Year festivities led to a surge in demand.
Key Takeaways:
- Inflation Uptick: China’s consumer price index (CPI) rose to 0.5% in July, exceeding analysts’ expectations of a 0.3% increase.
- Pork Price Surge: Pork prices, a key component of China’s CPI, jumped by 20.4% year-on-year, the highest increase since December 2022.
- Core Inflation Moderates: Core CPI, which excludes volatile food and energy prices, rose by 0.4% in July, down from 0.6% in June.
- Real Estate Slump Persists: Rental prices fell by 0.3% year-on-year in July, while home appliance prices dropped by 1.8%, reflecting continued weakness in the real estate sector.
- Producer Prices Decline: The producer price index (PPI) for July fell by 0.8%, slightly less than the anticipated decline but unchanged from June’s drop.
Rising Pork Prices Drive Overall Inflation
The increase in pork prices, a significant contributor to overall inflation in China, was primarily driven by supply chain disruptions and disease outbreaks affecting pig production. This has led to concerns about potential price volatility in the coming months, as the government seeks to balance price stability with food security.
"Conditions are in place to see inflation trend a little higher in the coming months but it should not impede further monetary easing," said Lynn Song, chief economist, Greater China, ING. "With low inflation and weak credit activity, domestic factors continue to favor further monetary policy easing."
Factors Weighing on Non-Food Prices
While pork price increases pushed up CPI, other sectors showed signs of deflationary pressure. This includes a price war in the auto industry, falling smartphone prices, and declining rents, all of which are contributing to a modest rise in non-food prices.
"The price war in autos, falling smartphone prices and a drop in rents posed near-term drags on non-food prices in China," Song added.
Tourism and Entertainment Show Mixed Results
Tourism prices rose moderately by 3.1% in July, but this was below the year-to-date increase of 6.4%. Meanwhile, education and entertainment prices climbed by 1.7%, slightly below the 2% increase for the year so far.
Transportation Prices Mixed
Transportation fuel prices rose by 5.1% in July, while prices for "transportation tools" fell by 5.6%. The category of "transportation tools" remains unclear, but the decline suggests potential softness in the demand for vehicles.
Real Estate Slump Deepens
The latest CPI data reinforces the ongoing real estate slump in China.
Rental prices declined by 0.3% in July, a steeper drop than the 0.1% decline seen for the year so far. This indicates that the weakening demand for housing continues to impact rental market dynamics.
Home appliance prices also fell by 1.8% in July, a significant drop compared to the 0.8% decline for the year so far. This suggests that consumers are delaying major purchases, potentially due to economic uncertainty and concerns about future income.
Producer Prices Reflect Weakening Demand
The producer price index (PPI) for July fell by 0.8%, slightly less than the expected decline but unchanged from June’s drop. This indicates that deflationary pressures continue to exist in the manufacturing sector.
Prices for building materials and non-metallic materials decreased by 5.2% in July, while prices for non-ferrous metals and wires rose by 11.3%. Prices for fuel and power increased by 0.5%.
The Caixin Manufacturing Purchasing Managers’ Index (PMI), released last week, also indicated a mild contraction in manufacturing activity in July. "Input cost inflation eased in the latest survey period, which alongside heightened competition led to Chinese manufacturers lowering average selling prices in July," the Caixin release stated.
Outlook for Chinese Economy
Despite the recent inflation uptick, fueled by pork prices, a range of factors suggest that China’s economy is still facing headwinds. The real estate slump, weakening consumer demand, and deflationary pressures in manufacturing are all causing concern for policymakers.
"We continue to look for at least one more rate cut this year with the potential for more if global rate cuts accelerate," said Song.
The Chinese government is likely to continue pursuing monetary easing policies to stimulate economic growth and maintain price stability. However, the effectiveness of these measures will depend on the pace of structural reforms and the global economic environment.
