China’s Factory Deflation Eased in June With Recovery on Track

A worker sits inside a control booth at the Jinguan Copper smelter, operated by Tongling Nonferrous Metals Group Co., in Tongling, Anhui province, China, on Thursday, Jan. 17, 2019. On the heels of record refined copper output last year, China's No. 2 producer, Tongling, says it'll defy economic gloom and strive to churn out even more of the metal in 2019. Photographer: Qilai Shen/Bloomberg , Bloomberg

Bloomberg News, Bloomberg News

Jul 8, 2020

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(Bloomberg) -- China’s factory deflation eased back in June as the economic recovery continued, while consumer inflation ticked up.

  • The producer price index registered a 3% decline last month from a year earlier, compared with the 3.7% drop in May.
  • The consumer price index rose 2.5% on year following a 2.4% gain the previous month, the National Bureau of Statistics said Thursday. That was the same as the median forecast.
  • The statistics bureau earlier published statements dated 2019 which were then withdrawn.

Key Insights

  • Pork prices, a key element in the country’s CPI basket, rose almost 82%. Pork prices have started rising again due to supply issues including floods and restrictions on meat plants overseas which had seen coronavirus outbreaks.
  • Core inflation, which removes the more volatile food and energy prices, slowed to 0.9%.
  • The recent serious flooding in central China may affect food supplies, which would push up prices for corn and rice.
  • However, “supply-side shocks caused by floods tend to be temporary, unlikely to create persistent inflationary pressure,” China International Capital Corp. economists Liu Liu and Peng Wensheng wrote in a note this week. The growth rate of consumer inflation should slow in the second half of this year due to the high base last year, they wrote.
  • The “economic recovery should continue following the recent rebound in the second quarter. Domestic consumption will likely improve further with continued policy support and activity normalization, assuming no significant re-emergence of new cases, while infrastructure investment is likely to strengthen,” UBS economist Wang Tao wrote in a note this week. “We expect policy to remain supportive, while the recent recovery has reduced incentive for bigger stimulus in the near term.”

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  • The official gauge of manufacturing activity climbed in June, providing more evidence of a gradual recovery from the historic contraction in the first quarter. The earliest indicators for the economy also pointed in the same direction.
  • That progress and the recent rally in the stock market provide some evidence of a rebound, but with the pandemic still hitting global demand, it’s unclear how long that will last.

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