China’s consumer inflation grows faster than expected to two-year high

Core prices outside food and energy barely budged, which is a sign that its zero-Covid restrictions continue to stifle spending on services

A shopkeeper hands over eggs to a customer, in Shanghai. Consumer demand in China remains depressed by the nation’s strict Covid control polices and sporadic outbreaks. EPA
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China’s consumer prices grew faster than expected in June, although the government’s zero-Covid strategy continued to depress demand. Factory-gate inflation moderated on cooling commodity prices.

Consumer prices grew 2.5 per cent last month from a year earlier, beating economists’ expectations of a 2.4 per cent gain, National Bureau of Statistics data showed on Saturday. That is the strongest pace in two years and compares with 2.1 per cent growth in May.

The producer price index, meanwhile, rose 6.1 per cent, above the median forecast of a 6 per cent increase in a Bloomberg survey of economists, though lower than May’s 6.4 per cent.

“China’s June inflation data signals slack demand,” Eric Zhu of Bloomberg Economics wrote on Saturday. “Core prices outside food and energy barely budged — a sign that Covid Zero restrictions continue to stifle spending on services.”

While growth in consumer prices is accelerating amid rising costs of energy, inflation is unlikely to become a crisis for China’s central bank similar to that facing its western peers. Consumer demand remains depressed by the nation’s strict Covid control polices and sporadic outbreaks.

The consensus now is for CPI to rise 2.2 per cent for the full year, well below the government’s target of keeping it around 3 per cent, although some economists expect it to surge above the threshold at some point in the second half of the year.

Core inflation, which removes the more volatile food and energy prices, rose 1 per cent, faster than May’s 0.9 per cent increase.

China’s economy showed some early signs of improvement in June, as Covid outbreaks and lockdowns eased. But high-frequency data suggests the economy contracted in the second quarter. Fresh virus flare-ups in parts of the eastern province of Anhui, and coastal provinces Jiangsu, Fujian and Guangdong, pose a growing threat to the fragile recovery.

The central bank’s stimulus has been relatively modest this year. The People’s Bank of China is scheduled to review its one-year lending interest rate on Friday, with the median estimate among economists surveyed by Bloomberg being for the rate to remain unchanged this month.

Amid heightened attention on the inflation outlook and under the pressure of capital outflows due to the Federal Reserve’s policy tightening, governor Yi Gang has signalled that for the rest of the year monetary stimulus would be likely to focus on boosting credit rather than lowering interest rates.

“Chinese inflation dynamics remain very different to those in other major economies,” Craig Botham, chief China economist at Pantheon Macroeconomics, wrote in a note before the data was released.

“Monetary policy will not need to tighten even after several rising prints, because the long-term outlook remains benign.”

Updated: July 09, 2022, 12:15 PM
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