China's inflation showed signs of cooling in June, as both producer and consumer price indexes rose less than anticipated. The Producer Price Index (PPI) climbed 4.1% year-on-year, but declined 0.3% from May. Similarly, the Consumer Price Index (CPI) increased 1% year-on-year, yet fell 0.3% month-on-month. Both figures slightly missed the average estimates from a Caixin survey of economists, which projected year-on-year PPI and CPI growth at 4.2% and 1.1% respectively. This indicates a broader slowdown in inflationary pressures, primarily attributed to easing global oil prices.
This cooling trend follows a period of elevated inflation driven by the Iran war. In April, producer prices surged 2.8% year-on-year, the highest since July 2022, and consumer prices rose 1.2%, both exceeding forecasts. May saw producer prices jump 3.9% year-on-year, topping estimates, while consumer prices rose 1.2% but missed forecasts. The Strait of Hormuz blockade due to the Iran war had significantly driven up commodity costs, with non-ferrous metals mining prices rising 38.9% and oil and gas extraction by 28.6% in April. Retail gasoline prices also saw sharp increases, up 19.3% in April and 23.5% in May from a year earlier.
Despite the recent cooling, the earlier inflationary pressures had helped China exit a three-year period of factory deflation in March, when producer prices rose 0.5% year-on-year. However, the persistent struggle with weak domestic demand, characterized by slowing retail sales and a continued real estate downturn, has limited the pass-through of higher input costs to consumer prices. Analysts note that while the "reflationary forces" from commodity prices were initially welcomed, they also risked pressuring companies' profit margins and dampening household consumption, as businesses faced rising costs but lacked pricing power.
