China's consumer inflation eases in July, creates room for easing

Chinese consumer inflation eased during the month of July on a year-on-year basis as a slower growth in food prices weighed on the consumer price index (CPI). However, the country’s producer prices witnessed a slight improvement that raised expectations that the economy’s overcapacity has started to moderate.

The consumer price index (CPI) rose 1.8 percent in July from a year earlier, compared with a 1.9 percent increase in June, data released by the National Bureau of Statistics showed Tuesday, the slowest pace since January's 1.8 percent. This came in line with a Reuters poll of analysts who had expected a gain of 1.8 percent.

Moreover, producer prices fell 1.7 percent from a year ago in July, better than analysts' expectations for a 2.0 percent decline, data showed. The Producer Price Index (PPI) had tumbled 2.6 percent on-year in June.

However, there are signs consumer goods sales are otherwise holding up. Kantar Worldpanel, a consumer sector research group, released a survey that showed fast moving consumer goods, such as perishables, grew 4.6 percent in China in the second quarter from a year earlier, faster than the 2.0 percent growth rate reported in the first quarter, Reuters reported.

Further, consumer inflation remained low, below the target band of around 3 percent of the People’s Bank of China (PBoC), indicating persistently weak demand in the world's second-largest economy. However, the analysts at ANZ believe that the central bank is unlikely to lower the interest rates against the backdrop of improving producer prices.

Meanwhile, economists said they expect food prices to ease further in the coming months given weaker demand, despite the lingering impact of flooding. China’s top planning agency National Development and Reform Commission (NDRC) has predicted consumer inflation of 2.0 percent this year.