Jianwei Xu (Natixis) | The newly released inflation data for June begins to justify our view of the temporary feature of China’s inflation against the backdrop of a potentially slower growth environment.
The message is particularly clear for the industrial price. After acceleration for nearly one year since May 2020, China’s PPI YoY growth rate finally retreated moderately to 8.8% in June from 9.0% in May. The MoM growth rate also declined significantly. While the upstream sector’s producer price remained significantly higher than that of the downstream sectors, both the upstream and downstream sectors have witnessed moderation in the price momentum, indicating slower demand for the producers and potentially lower profit margin for industrial corporates.
The rise in consumer price also halted to an end in June. Not only the CPI YoY growth rate down to 1.1% in June from 1.3% in May, the MoM growth rate also declined by 0.4% during the past month. The slump in CPI price is largely driven by the big drag from the volatile component. In particular, pork price decelerated by -36.5% YoY in June. But pork is not the only food factor dragging down CPI. The vegetable price growth rate also dropped to 0.1% YoY from 5.4% YoY last month.
The inflation environment looked more stable for consumers after excluding the food component. The non-food CPI price even gained slight increase in June to grow 1.7% from 1.6% in May. However, the situation was partly supported by the rising energy price. After further excluding the energy price, China’s core CPI growth rate remained stable on both YoY and MoM basis. Moving forward, if China’s macroeconomy continues to slow down and the commodity price stabilizes, the eased factory inflation pressure may further weigh on the consumer price, including its core components.
So far, the slower change in core CPI relative to PPI delivers an important message for the markets. First, it suggests that China’s inflation slowdown will be likely gradual, echoing smooth deceleration in China’s macroeconomy. Second, the gradual change in inflation provides certain room for the government to step in later. In the second half of 2021, Chinese government may take more active fiscal and inject more liquidity to support the economy. The recent government announcement on a possible move to cut RRR is a signal in this regard.