As of June, China’s CPI turned positive, rising 0.1 percent year on year. This increase represents a rebound from the previous reading of -0.1%. The country is on the brink of economic calamity right now. While this is a concern, this change indicates that consumer prices should be leveling off soon. The CPI core, which excludes more volatile categories such as food and energy, rose sharply. It increased from 0.6% to 0.7% YOY.
The data published in the National Bureau of Statistics of China shows an increasingly complicated economic adjustment. The CPI release marks good news on consumer price inflation front. The Producer Price Index (PPI) continues to indicate deflationary pressures. Wholesale inflation as measured by the PPI plunged further into negative territory. It now indicates a deflation rate of -3.6% y-o-y, from -3.3% last month.
Only the first jump of the Consumer Price Index (CPI) in May 2021 stands alone. This is a positive sign for a consumer demand rebound following several months of price decreases. Analysts have been looking for any sign of positive growth from the Chinese economy. They consider it a positive development indicative of the economy’s resilience, particularly in light of chronic global economic uncertainty.
Core CPI’s increase of 0.7% shows that the inflationary pressures are slowly starting to develop at least, and in any case, it is happening at a snail’s pace. Core inflation is a better gauge of long term inflationary trends. It takes out the month-to-month volatility associated with food and energy costs. The month-to-month increase might indicate that the trend in longer-term, underlying demand is starting to strengthen, a positive sign for future economic growth.
The ongoing PPI drops point to serious difficulties impacting China’s manufacturers and suppliers. Unpacking the PPI The PPI is an average measure of price changes on goods and services sold by domestic producers. A decline in the PPI indicates that producers are receiving reduced prices for their products compared to one year ago. Such a trend is usually a portent of slack demand or excess capacity elsewhere in the economy.
Some economists are concerned that continued deflation in producer prices will pinch manufacturers’ profit margins. This pressure could impact the way they invest their dollars and reverse job gains in key sectors. That deflationary trend creates a major conundrum for the PBoC. They’re walking a tightrope between stimulating growth and controlling inflation expectations.
Certainly, China is looking at a much harder eye on its economic statistics. Policymakers need to act now to increase consumer access to capital and provide relief for manufacturing industries under pressure from prices. Researchers urge caution with these new economic markers. Our vigilance will go a long way towards developing the appropriate policy responses moving forward.