China: Negative Headline, But Breakdown Suggests Temporary

Figure 1: China Headline and Core Inflation (Yr/Yr %)

Source: Datastream/Continuum Economics 

The breakdown of the July CPI data shows a contrast between headline inflation and a better underlying trajectory. Key points to note include

• Headline dragged down by base and food. Yr/Yr headline inflation fell from zero to -0.3% versus -0.4% expected, with the key issue being food inflation falling -1.7% Yr/Yr. One of the issue is falling pork prices, which also prompted a temporary phase of negative inflation in 2020.Base effects from a large July 2022 monthly increase was also a factor. Mth/Mth headline CPI rose +0.2%, which contrasts with the Yr/Yr figure. 
• Core Yr/Yr rose from +0.4% to +0.8%, which is probably a better indication of underlying inflation pressures. The reopening boosted tourism prices that rose +13.1% Yr/Yr in July versus +6.4% in June. Household items also fell 0.2% Yr/Yr after -0.5% in June. The breakdown of the core CPI figure suggests that some inflation creation remains in the economy. Meanwhile, PPI fell 4.4% Yr/Yr in July compared to -5.4% in June.
• Negative swinging back to positive. A few more months of small monthly rise should mean that negative inflation is only a temporary issue and we forecast that the Yr/Yr rate should be positive again by October/November helped by base effects. Oil prices have also picked up over the summer and this should see fuel prices drifting higher later in the year. Even so, the run of low inflation figure and the prospect for the next few months means that we are revising down are 2023 and 2024 CPI inflation forecasts to +0.4% and +1.0% Yr/Yr versus +0.7% and +1.5% in the June Outlook.