China factory prices ease, while consumer inflation picks up

Beijing

CHINA'S factory deflation eased in July, driven by a rise in global oil prices and as industrial activity climbed back towards pre-coronavirus levels, adding to signs of recovery in the world's second-largest economy.

The producer price index (PPI) fell 2.4 per cent from a year earlier in July, the National Bureau of Statistics (NBS) said in a statement on Monday, compared with a 2.5 per cent decline tipped in a Reuters poll of analysts and a 3.0 per cent drop in June.

Analysts say China's industrial output is steadily returning to levels seen before the pandemic paralysed huge swathes of the economy, as pent-up demand, government stimulus and surprisingly resilient exports propel a recovery.

Iron ore futures prices in Dalian have rallied over 50 per cent so far this year while prices of steel bars used in construction have jumped 12 per cent.

Prices of petroleum and natural gas extraction led the headline gains, rising 12 per cent month-on-month, thanks to the continued rebound in global crude oil prices, according to Dong Lijuan, a senior statistician at NBS. Coal mining and automobile manufacturing prices also turned positive in July.

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"A further ramp-up in fiscal stimulus should continue to shore up infrastructure spending in the coming months, supporting a further recovery in economic activity and producer prices," said Julian Evans-Pritchard, senior China economist at Capital Economics.

However, PPI rose 0.4 per cent on a monthly basis, unchanged from the increase in June, pointing to strains on construction and production work caused by recent floods in southern China. Some economists have warned that the recovery could stall amid cautious consumer spending and a resurgence in global infections.

Consumer inflation also picked up up in July as the bad weather pushed food prices higher.

The consumer price index (CPI) rose 2.7 per cent from a year earlier, its fastest pace in three months and compared with an expected 2.6 per cent increase and a 2.5 per cent rise in June.

It was mainly driven by surging pork prices, which rose 85.7 per cent on a yearly basis.

However, core inflation, which excludes the more volatile food and energy costs, rose a mere 0.5 per cent in July from a year earlier. That's the weakest reading since 2010.

"The moderation in core CPI was mainly due to tourist package prices - we usually see a price increase in July due to the holiday season, whereas prices declined by 1.5 per cent month-on-month last month," said Michelle Lam, greater China economist at Societe Generale in Hong Kong. "The moderation reflects broader weakness in the consumer service sector, which would recover only gradually due to Covid-19."

China's economy is continuing its gradual recovery into the second half of the year, driven by production resumptions and the release of pent-up demand. But whether that momentum can be sustained depends at least in part on how fast demand can catch up with production and how China copes with uncertainties including Sino-US tensions and new virus outbreaks.

"The higher-than-expected price increase will strengthen the determination of the monetary authorities to normalise policies," said Hu Yuexiao, chief macro analyst at Shanghai securities. REUTERS, BLOOMBERG