【Economic Perspectives】China inflation in Jun – PPI contraction pressure alleviated further

China’s NBS released inflation monitors of Jun. CPI growth post 2.5% YoY, same as our estimate, while PPI declined 3.0% YoY, 0.2ppt better than our estimate. In 1H20, CPI/PPI growth recorded 3.8%/-1.9% YoY. Overall speaking, inflation outlook remained modest and PPI contraction pressure will continue to alleviate with the gradual recovery of domestic and overseas demand. Our annual CPI/PPI growth forecast is pegged at 3.1%/-2.0% YoY.


  • Slackness in non-food prices continued. CPI growth accelerated 0.1ppt from May to 2.5% YoY in Jun, which was mainly attributable to strengthening food prices. Prices of food, tobacco and liquor increased 8.8% YoY in Jun, up 0.3ppt from May. The outbreak of COVID-19 in Beijing interrupting fresh food supply and severe floods in certain provinces lifted food prices in Jun. Non-food price growth, however, remained lackluster at 0.3% YoY in Jun. Except transportation & communications, other non-food categories post deceleration in YoY growth.


  • Rebound of pork prices, which was up 81.6% YoY and contributing to 2.05ppt of CPI growth in Jun. We think MoM increase of pork prices may likely continue into Jul, which was more a result of within-year seasonal cyclicality and demand-side recovery of restaurant and catering sector. Hog price has climbed back to around RMB 33. Supply conditions of the breeding industry have been steadily improving since 4Q19. That being said, we do not expect pork prices to continue climbing to previous highs.


  • PPI – MoM growth turned positive at +0.4%, vs. -0.4% in May. YoY decline narrowed to 3.0% in Jun from 3.7% in May. This trend echoed PMI price indices in Jun, which also strengthened notably with the steady recovery of domestic demand. Major industries recorded narrowing decline of PPI growth in Jun, including oil & natural gas extraction, oil, coal & other fuel processing, chemical products manufacturing, ferrous and non-ferrous metal processing.


  • Future inflation trends. 1) CPI growth is likely to stay between 2.0-3.0% in the next few months. It may strengthen further in Jul due to seasonal factors and stormy weather; 2) alleviating PPI contraction pressure, although YoY growth may remain in negative territory.


  • Risks. To the upside, 1) stormy weather and floods causing food supply shortage in summer; 2) commodity price increase. Downside risks mainly involves slower-than-expected economic recovery dragging non-food CPI and PPI growth.


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