China Inflation Slows Again, Giving PBOC Room for Easing

Consumer prices in China grew less rapidly in July as increases in food costs abated, giving authorities more room to ease monetary policy in the world’s second-largest economy.
China’s Consumer Price Index rose 1.8% year-over-year in July, down from a 1.9% reading in June, the National Bureau of Statistics said Tuesday. This was the third consecutive month that the key inflation measure lost speed, putting it further below the government’s 3% ceiling for the year. The reading was in line with a median 1.8% gain forecast by 17 economists surveyed by The Wall Street Journal.
China’s Producer Price Index, which measures prices at the factory gate, fell 1.7% in July from a year earlier, which was a smaller decline than economists expected and compares with a 2.6% on-year drop in June. The index has lingered in deflationary territory for more than four years, but the decline has narrowed since the beginning of this year.
“These price indicators are very stable compared to before,” said BBVA Research economist Xia Le. “But growth is still anemic. There’s still room for authorities to do more stimulus.”
As growth has slowed this year, Beijing has ramped up spending on infrastructure projects, cut red tape and maintained a loose monetary policy. Mr. Xia expects two half-point reductions in required bank reserves and one quarter-point interest rate cut before the end of the year as China works to hit its 2016 growth target of at least 6.5%. Growth this year is likely to be at its slowest annual pace in a quarter-century, economists say.
Data released on Monday showed China’s imports fell by more than 12% in July, signaling weak domestic demand. And the official purchasing managers index in July dipped into contractionary territory for the first time since February.
Consumer inflation edged down in July as vegetable prices, which rose nearly 20% in the first half of the year, decelerated during the peak summer growing season. Pork prices, which rose 28% from a year earlier in the first half, rose by about half that pace in July despite widespread flooding across China.
“A lot of piglets died in the south from flooding,” said Dan Wang, analyst at research group EIU Access China. “They can’t live if it’s too humid or warm, that’s very bad for piglets.”
Flooding this year has left more than 200 people dead, battering 28 provinces and resulting in direct economic losses in excess of 147 billion yuan ($22 billion), according to China’s Office of State Flood Control and Drought Relief. Provinces along the Yangtze River directly affected by the floods produce nearly 40% of the nation’s pork and almost 60% of its rice, research firm Business Monitor International Ltd. estimates.
Liu Fuhai, a 40-year-old manager of a kiosk in Beijing, said food prices continue to rise, but his income also rises in the summer since people buy more newspapers and cold drinks. “The price of eggs and pork seems higher these days,” he said. “But we continue to buy what we need without getting too bothered.”
Economists said they expect food prices to ease further in the coming months given weaker demand, despite the lingering impact of the flooding. China’s top planning agency has forecast consumer inflation of 2.0% this year.
On the producer side, higher global commodity and raw-material prices and a stronger housing market in China saw deflation ease. Since the start of the year, producer prices have improved by more than 2 percentage points, which has helped bolster company earnings to 6.2% growth in the first half from a 2.3% decline a year earlier, according to ANZ Group Ltd.
Grace Zhu and Liyan Qi contributed to this article.