Inflation Below Expectations! China's July PPI and CPI Soften, Deflationary Pressures Linger

Experts say lower oil prices combined with weakening demand caused China's July consumer and producer price inflation to fall short of expectations. However, government efforts to stabilize prices have shown limited effectiveness, and uncertainty in oil prices means full-year inflation is still expected to follow an 'M-shaped' pattern.

China's National Bureau of Statistics released data on Sunday (August 9) showing that producer price growth in July slowed to its lowest in three months, while consumer prices also softened more than economists had anticipated. Analysts attributed this to falling global oil prices and weak domestic demand.

Specific data: PPI and CPI both declined

The Producer Price Index (PPI) rose 3.5% year-on-year in July, down from 4.1% in June and the lowest in three months. Economists surveyed by Reuters had expected a 3.8% increase, as did those surveyed by Bloomberg. The statistics bureau said the PPI rise was driven mainly by mining and raw materials sectors, while food and daily consumer goods prices declined.

The Consumer Price Index (CPI) rose 0.5% year-on-year, the slowest since January and below Bloomberg's forecast of 0.8%. Core CPI, excluding food and energy, rose 0.9%, while food prices fell 1.5%. On a month-on-month basis, CPI declined 0.1%, contrary to the expected 0.2% increase, following a 0.3% drop in June.

Expert analysis: Full-year inflation to follow an 'M-shaped' trend

Xing Zhaopeng, Senior China Strategist at ANZ Bank, said lower oil prices and weak demand caused both consumer and producer inflation in July to underperform expectations. With oil price trends still uncertain, the impact on inflation remains difficult to predict. He believes the effects of accelerated fiscal spending in the second half of the year will be delayed by about one quarter and maintains his forecast of an 'M-shaped' inflation trend for the year. ANZ forecasts full-year PPI at 2.5% and CPI at 1.0%.

Zhang Zhiwei, Chief Economist at Baoyin Asset Management, noted that the slowdown in inflation aligns with other activity indicators like PMI. Economic momentum weakened in Q2, and the July Politburo meeting signaled increased fiscal spending as a policy response. However, the transmission of fiscal funds takes time, and it will take another one to two months to assess its impact on boosting domestic demand.

Structural issues: Government efforts to stabilize prices have limited effect

China faces a 'two-speed economy': strong factory output and exports, but persistently weak domestic demand. Leadership has pledged to support growth by accelerating budgeted infrastructure spending. A high-level meeting in late July also vowed to curb 'involution-style' competition—price wars where manufacturers sacrifice profits to gain market share—and promised timely, practical new policies to expand domestic demand and improve supply.

Notably, an external factor that previously pushed up China's producer prices and ended years of deflation was the energy price shock caused by U.S.-Israel tensions with Iran and the potential closure of the Strait of Hormuz. In contrast, the Chinese government's own efforts to curb industry price wars and stabilize prices have so far had limited success.

Growth model: Need to shift toward household consumption-driven growth

On the demand side, a sluggish property market and unstable employment continue to suppress household consumption of goods. Economists believe deflationary pressures remain. July's official survey showed manufacturing activity contracting, while private surveys indicated expansion slowing to a four-month low, both pointing to weakening new orders. Although some upstream and high-tech industries maintained strong profit growth, many manufacturers serving the domestic market are struggling amid weak demand. Rising input costs could further squeeze profit margins and dampen business confidence.

Additionally, two days before the price data release, July's trade figures showed strong growth in both imports and exports, driven by rising overseas demand for AI-related technology products. This year's robust export performance has helped China's vast manufacturing sector weather prolonged domestic demand weakness.

Many economists argue that China needs to shift toward a growth model driven more by household consumption, rather than continuing the decades-old reliance on real estate and infrastructure investment.

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