Goldman Sachs: July CPI and PPI Double Decline, Inflation Unexpectedly Weakens

Overview

This research report reviews China's inflation data for July 2026, noting that both CPI and PPI year-on-year growth rates experienced unexpected declines. CPI dropped from 1.0% in June to 0.5%, and PPI fell from 4.1% to 3.5%, both below Goldman Sachs' forecasts and Bloomberg market consensus. The report attributes the slowdown in inflation primarily to declines in energy-related products, tourism services, and upstream industrial product prices, signaling dual weakness in demand and cost sides in the short term.

Core views

CPI year-on-year growth significantly missed expectations, showing clear structural divergence. July CPI rose 0.5% year-on-year, a substantial drop from 1.0% in June, and was below Goldman Sachs' forecast of 0.9% and market consensus of 0.8%. Seasonally adjusted month-on-month annualized decline reached -4.3% (June was -1.1%). Dragging factors mainly came from non-food sectors: non-food CPI year-on-year dropped from 1.5% to 0.9%, where fuel costs' year-on-year increase plummeted from 15.3% to 0.8%, transportation service price increases fell from 4.5% to 0.4%, and tourism-related service prices also notably declined. Food inflation marginally improved, with the year-on-year decline narrowing from -1.6% to -1.5%, mainly benefiting from pork prices' year-on-year decline narrowing from -15.9% to -13.3%, although fresh fruit price declines expanded slightly. Core CPI saw a slight retreat, indicating still weak domestic pricing power. Core CPI excluding food and energy dropped microscopically from 1.0% in June to 0.9% in July, with month-on-month annualized growth of only 0.1%. This trend was mainly influenced by softening gold jewelry prices and declining home appliance prices, suggesting that after excluding volatile energy and food items, endogenous pricing power related to resident consumption remains insufficient. PPI decline was entirely driven by upstream industries, with limited transmission to mid-to-downstream sectors. July PPI rose 3.5% year-on-year, below Goldman Sachs' forecast of 4.0% and market consensus of 3.9%, further dropping from 4.1% in June; month-on-month annualized decline reached -7.6% (June was +1.7%). Upstream sector contribution to PPI year-on-year decreased by 0.7 percentage points compared to June, mainly attributed to falling prices in oil/gas extraction, non-ferrous metals, and chemicals. In contrast, consumer goods PPI year-on-year decline narrowed only slightly from -0.9% to -0.8%, indicating that upstream price declines have not yet significantly pulled or supported mid-to-downstream consumer goods ex-factory prices.

Analysis framework

The report employs a combined approach of aggregate decomposition and structural attribution to analyze inflation data. First, it compares actual values with institutional own forecasts and market consensus to confirm the direction of the 'unexpected decline' expectation gap; subsequently, it breaks down CPI into dimensions such as food/non-food, goods/services, core/overall, and decomposes PPI along upstream/downstream industry chain links, individually identifying price change magnitudes of each component and their contribution changes to the total index, thereby locating the core drivers of weakening inflation (such as energy, tourism, upstream raw materials), rather than staying merely at the aggregate reading level.

Methodology notes

• Macroeconomic frameworkVolume-price decomposition

  Decompose inflation indices into sub-items such as food/non-food, core/overall, upstream/downstream, observing their price changes separately

  Through structured decomposition, one can distinguish whether inflation changes stem from supply shocks (e.g., oil prices), seasonal factors (e.g., tourism), or domestic demand strength (e.g., core CPI), avoiding being misled by a single aggregate indicator. This report used this method to identify that the main cause of CPI weakness was energy and tourism, rather than comprehensive deflation.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission in Industry Chain

  When analyzing PPI, distinguish between price changes and contributions of upstream production materials and downstream living materials

  Upstream prices are heavily influenced by commodities, while downstream is closer to terminal demand. By comparing movements in both, this report judged whether price pressure originated from the cost side or demand side, and whether there was transmission blockage toward the consumer end.

Key data

• July CPI YoY+0.5%Below Goldman Sachs forecast of +0.9% and market consensus of +0.8%; June was +1.0%
• July PPI YoY+3.5%Below Goldman Sachs forecast of +4.0% and market consensus of +3.9%; June was +4.1%
• July Core CPI YoY+0.9%Slight decrease from +1.0% in June, reflecting weak gold and home appliance prices
• July Non-Food CPI YoY+0.9%Significant drop from +1.5% in June, mainly due to price drops in oil/gas and tourism services
• July Food CPI YoY-1.5%Marginal improvement from -1.6% in June, narrowing pork price decline
• Change in Upstream Contribution to PPI YoY-0.7ppDecreased in July compared to June, mainly due to lower prices in oil/gas, non-ferrous metals, and chemicals

Impact & implications

The simultaneous weakening of inflation data indicates that the current Chinese economy faces certain downward price pressures. The rapid decline in energy and tourism services on the CPI side may have temporary characteristics, but the persistent slump in core CPI suggests that resident consumption willingness and pricing ability still need repair. On the PPI side, if the significant pullback in upstream prices continues, it may gradually transmit to mid-to-downstream sectors over the next few months, compressing nominal revenue growth for industrial enterprises, but potentially alleviating cost pressures for some mid-to-downstream industries. Overall, the low inflation environment provides room for subsequent monetary policy to remain accommodative.