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Forex▼ Bearish
China CPI Slows to 1%, PPI Hits 3-Year High at 4.1%
China's June CPI slowed to 1% yoy, missing forecasts, while PPI hit 4.1% - a three-year high. The gap between weak consumer demand and elevated producer costs tests PBOC's policy room.
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China's consumer inflation slowed more than expected in June, while producer prices hit their highest level in nearly three years. The gap between weak domestic demand and persistent upstream cost pressures widened.
The consumer price index rose 1.0% from a year earlier, down from 1.2% in May and below the 1.1% forecast. Month on month, prices fell 0.3%, steeper than the 0.2% decline economists had expected. Core CPI, which strips out food and energy, eased to 1.0% from 1.1%, its slowest pace since January.
The National Bureau of Statistics said softer prices for gold jewellery and gasoline drove the moderation. The drop in gasoline prices followed the sharp fall in global crude oil after the US and Iran reached a ceasefire in June, easing imported inflation.
Producer prices rose 4.1% from a year earlier, matching expectations and accelerating from 3.9% in May. That was the highest annual reading since July 2022. The NBS pointed to higher prices in coal mining, electrical machinery, electronics and ferrous metals as the main drivers. Month on month, producer prices fell 0.3%, the first decline since February. The oil price collapse after the ceasefire weighed on energy-related inputs.
The divergence between weak consumer inflation and still-elevated producer prices matters for the yuan and commodity markets. Soft CPI gives the PBOC room to keep policy accommodative. High PPI limits the scope for rate cuts. The month-on-month drop in PPI, the first since February, reflects the oil price ceasefire feeding through to lower input costs.
For the yuan, a PBOC that leans dovish would add to depreciation pressure, especially if the dollar stays strong. The oil price ceasefire has already helped lower import costs. Coal and metals prices remain supported by domestic demand and supply constraints.
The PBOC's next rate decision is due later this month. The data will inform whether the central bank sees room to cut rates or reserve requirements to support growth.