China's Consumer Inflation Slows, Producer Prices Rise Most Since 2022

Residents buy fresh vegetables at a supermarket in Pingyi, Shandong, China. Chinese consumer prices slowed in June, while producer prices rose the most since July 2022. Photo: Xinhua.

JAKARTA - China's consumer prices grew slower than expected in June. However, prices at the producer level actually rose the most since July 2022. This shows that the Chinese economy has not moved evenly.

On one hand, exports and factories are still quite strong. On the other hand, household spending and the property market are still weak.

CNBC quoted Thursday, July 9, saying China's consumer prices rose 1 percent in June compared to a year earlier. The figure was lower than economists' forecasts in a Reuters poll of 1.1 percent and slowed from 1.2 percent in May.

Data from the National Bureau of Statistics released Thursday also showed that the core consumer price index or core CPI rose 1 percent year-on-year. This index does not include food and energy prices, which often rise and fall sharply.

The increase in core CPI was slightly lower than May's 1.1 percent. Meanwhile, food prices fell 1.6 percent year-on-year, less than the 1.7 percent decline in May.

At the factory level, the story is different. The producer price index or PPI jumped 4.1 percent year-on-year, according to economists' forecasts and higher than 3.9 percent in May.

According to LSEG data, the PPI increase was the strongest since July 2022. However, on a monthly basis, the PPI fell 0.3 percent based on official data.

PPI measures changes in the prices of goods at the producer or factory level. This figure is often used to read production cost pressures before goods reach consumers.

Tianchen Xu, senior economist at the Economist Intelligence Unit, said oil prices in general began to ease. This condition can hold PPI from rising higher.

"Oil prices in general are on a path of easing, and this will prevent PPI from rising higher," Xu said.

He assessed that the annual strengthening of PPI was also influenced by the low base effect. This means that this year's figure looks high because the comparison in the previous year was very low.

"Factories cannot fully pass on the cost increase to buyers or other companies that use goods from the factory," said Xu.

The statement shows that China's domestic demand is still weak. When purchasing power is not strong, factories are not easy to raise prices to customers.

In June last year, Chinese producer prices recorded the worst decline in almost two years, falling 3.6 percent year-on-year. At that time, the deepening price war also spread to the economy.

Producer prices rebounded in March as input costs rose due to the Middle East conflict. The condition helped end one of China's longest periods of deflation in decades.

Deflation is a condition when prices generally fall. This condition often arises when demand weakens.

In addition to the rising commodity costs due to supply disruptions caused by the war, wholesale prices are also driven by demand for artificial intelligence or AI computing power. Computing power is the ability of a computer to run large processes, including AI services.

The demand also boosted the price of technology and semiconductor equipment. Semiconductors are the main components for electronic and computing devices. The need for chips has increased because AI services and data centers require large computing capacity.

China's manufacturing activity grew faster than expected in June. Experts say overseas demand, including for AI-related technologies, has also boosted the momentum.

However, the picture of the Chinese economy is not entirely solid. Neo Wang, China strategist at Evercore ISI, said many investors now see a pattern of two-speed growth as a long-term feature of the Chinese economy.

This pattern can be seen from strong exports, while consumption and the property market are still weak.

Wang said consumer sentiment remained sluggish as households still faced negative wealth effects due to the prolonged property market downturn.

Negative wealth effects occur when the value of assets, such as houses, falls. When they feel their wealth is decreasing, households tend to hold back on spending.

The economy, which is still supported by exports and manufacturing, is expected to make Beijing not rush to provide large stimulus to encourage consumption. Stimulus is a policy stimulus or economic assistance from the government to restart economic activity.

"Policymakers will likely refrain from any new major stimulus unless the slowdown continues after the conflict," said Gabriel Wildau, managing director at Teneo.

Wildau said the Politburo's high-level policy meeting of the Chinese Communist Party at the end of July was the next opportunity to increase policy stimulus.

The International Monetary Fund or IMF on Wednesday estimated that China's economy grew better than the global economy this year. The IMF raised its growth projection for China to 4.6 percent from 4.4 percent.

At the same time, the IMF cut its global economic growth forecast to 3 percent. China set a growth target of 4.5 percent to 5 percent this year.

The IMF attributed the more optimistic view to strong high-tech manufacturing, China's export performance, and accelerated public infrastructure investment since the beginning of the period.