Inflation declines to lowest level since March in June

Consumer inflation dropped to 0.2% in June from May’s 0.3%. June's reading marked the lowest inflation rate since March and undershot market expectations. Looking at subsectors, higher non-food prices outweighed lower food prices. Factors such as muted domestic demand, a weak housing market, massive domestic manufacturing capacity, and elevated competitive pressures in sectors such as electric vehicles have all contributed to keeping inflation low in recent months. The annual average variation of consumer prices was flat in June (May: -0.1%). Meanwhile, consumer prices fell 0.20% in June over the previous month, a sharper drop than the 0.10% fall recorded in May. June's result marked the sharpest fall in prices since March. Finally, producer prices fell 0.8% on an annual basis in June, which was a more modest drop than May's 1.4% decrease.

Summarizing recent inflation data, ING’s Lynn Song said: “Through the first half of the year, China's CPI inflation is barely positive at 0.1% YoY, as the -2.7% YoY drag from food prices in the year to date weighed heavily on the headline level. While non-food inflation has fared relatively better at 0.8% YoY through the first half of the year, inflation remains well short of the typical 2% inflation target.” On monetary policy implications, DBS Bank’s Samuel Tse said: “Weak inflation suggests that current real interest rates are probably too high, which will continue to hamper investment and consumption sentiment. Broad money supply growth is also on the downtrend, indicating tightening liquidity conditions. Against this backdrop, the PBOC may consider cutting the RRR as soon as 3Q. The window for benchmark rate cuts is also opened as major central banks are on track with their rate cut cycles.”

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