China’s Consumer Prices Rise Unexpectedly in July, Driven by Food Prices

In a surprising turn of events, consumer prices in China rose by 0.5% in July compared to the previous year, surpassing the expectations of most analysts. This increase was primarily fueled by a halt in the decline of food prices, which had been dropping in the previous month. Commerzbank’s FX strategist Volkmar Baur highlights this shift in the market.

Core Inflation Hits Record Low Outside of Pandemic

On the flip side, core inflation plummeted to a mere 0.4% year-on-year, matching the levels seen in January – the lowest ever recorded outside of the pandemic. The ongoing property crisis in China is evidently impacting inflation rates.

Housing Costs Take a Hit

Although China does not disclose the official weights for its CPI basket, estimates suggest that housing costs make up approximately 20% of the index. The downward trend in housing prices is becoming more pronounced, marking a new development outside of pandemic times. In July, housing costs saw a 0.3% year-on-year decline, which is also reflected in the core rate due to its assumed significant weight in the index.

China on the Verge of Deflation?

Despite the overall positive price trends, none of the major categories recorded a year-on-year inflation rate above 2%. While China is not currently in a state of deflation, there is a looming risk that an external shock could push the country into deflation. This perceived risk is already factored into the currency and bond markets, exerting pressure on the Chinese Yuan (CNY).

Analysis:

The unexpected rise in consumer prices in China, driven mainly by food prices, may indicate a shift in the market dynamics. However, the record-low core inflation rate and declining housing costs present challenges for the economy. The risk of falling into deflation poses a significant threat, impacting not only the currency market but also potentially affecting the overall financial stability in China. Investors and individuals need to closely monitor these developments to make informed decisions regarding their investments and finances.

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