China's July CPI hits six-month low, PPI eases to 3.5%

Lower oil costs combined with weakening demand pushed both CPI and PPI below expectations, the analyst said. Oil price trends remain uncertain, so the effect on inflation will also stay uncertain. Economic momentum softened in the second quarter, the analyst added. July's Politburo meeting signalled stronger fiscal spending as the policy response, with the transmission into demand expected to take about a quarter to materialise. That aligns with a view that inflation will follow an M-shaped path for the rest of the year.

For markets, the soft inflation readings are a mildly negative signal for Chinese consumer-facing equities. Continued weakness in household spending tied to the property slump and job insecurity means near-term upward price pressure is limited. The lag before fiscal stimulus feeds through means investors are likely to look past the near-term weakness and focus on the pace and scale of implementation in the second half.

Factory activity contracted in July, according to an official purchasing managers' index, and slowed to a four-month low in a private-sector survey. Both showed weakening new orders. China's top leaders, at their late-July meeting, vowed to continue cracking down on price wars among manufacturers competing for market share at the expense of profits. They pledged to introduce new policies more forcefully to expand domestic demand.

The inflation data follows trade numbers released Friday showing exports and imports both surging, boosted by strong overseas demand for AI-related technology products. That divergence between resilient external trade and subdued domestic activity is likely to persist until fiscal spending gains traction.