China's June CPI declined while PPI rose again; healthy reflation still requires domestic demand support
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China's June CPI declined while PPI rose again; healthy reflation still requires domestic demand support
HSBC believes that delayed oil price pass-through, AI-related demand, and anti-involution policies are pushing up PPI, but CPI lacks clear upward momentum, making a recovery in domestic demand still critical.
- June CPI slowed year on year to 1.0%, affected by lower refined oil prices, weaker food prices, and a slight softening in core CPI.
- PPI rose year on year to 4.1%, mainly due to base effects, AI-related capital expenditure demand, coal prices, and anti-involution policies.
- Downstream consumer goods industries are still absorbing the earlier rise in raw material costs, while weak end demand limits their ability to pass costs on to consumers.
- The report expects PPI growth to potentially decline in the third quarter, while sustained recovery in core CPI still depends on services consumption and improved household confidence.
Report interpretation
Overview
This report focuses on China's June inflation data. HSBC points out that CPI declined year on year to 1.0%, below both market expectations and HSBC's previous forecast; PPI rose year on year to 4.1%, in line with market and HSBC expectations. The report's core view is that upstream price pressures remain supported by base effects, delayed energy price pass-through, AI demand, and anti-involution policies, while consumer prices still lack sustained upward momentum and healthy reflation requires a rebound in domestic demand.
Core views
First, food and energy prices weighed on CPI, with pork, vegetables, fruit, and vehicle fuel prices all putting pressure on overall inflation. Second, core CPI slowed year on year due to base effects; prices of AI-related communications equipment and tourism services provided support, while weaker trade-in subsidy support and falling gold prices reduced contributions from some categories. Third, rising PPI does not mean that cost pressures have been fully passed through to consumers. Constrained by weak end demand, downstream industries continue to absorb more of the raw material costs. Fourth, if upstream price momentum reverses in the third quarter, the risk of PPI passing through to core CPI will decline significantly.
Analysis framework
The report uses a breakdown of CPI and PPI components, analyzing price changes in food, energy, core consumer goods, upstream resources, midstream industrial products, and downstream consumer goods, while combining base effects, global oil prices, domestic policies, AI-related capital expenditure, and household consumption confidence to assess the future inflation path.
Methodology notes
Determine the sources of inflation through food, energy, core services, upstream resources, and manufacturing components.
This framework distinguishes whether price increases stem from supply-side costs, policy impacts, base effects, or improved end demand, thereby assessing whether inflation is sustainable.
Assess whether upstream PPI pressures can pass through to downstream consumer prices.
The report believes that weak domestic end demand makes it difficult for downstream industries to pass costs on to consumers, so rising PPI has not yet significantly lifted core CPI.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- China MacroeconomyDirectly Related
- Strengths
- Rising PPI indicates improved prices in some industrial sectors, while AI-related demand and anti-involution policies support certain manufacturing industries.
- Weaknesses
- CPI remains weak, with food, energy, and insufficient end demand limiting overall reflation.
- Comparison
- Compared with the improvement in PPI, CPI and core CPI are weaker, indicating that the price recovery remains uneven.
- Risks
- Insufficient recovery in domestic demand may delay healthy reflation.
- AI-Related Hardware Industrial ChainPositively Related
- Strengths
- Global AI-related capital expenditure supports prices of computers, communications equipment, semiconductors, and related components.
- Weaknesses
- Price support is concentrated in specific industries and cannot alone represent an overall recovery in demand.
- Comparison
- AI-related hardware prices have performed better than those in traditional downstream consumer industries.
- Risks
- If global AI capital expenditure slows, related price support may weaken.
- Energy and Upstream Resources IndustriesBidirectionally Related
- Strengths
- Coal prices are supported by high-temperature demand, anti-involution measures, and safety inspections, increasing their contribution to PPI.
- Weaknesses
- The decline in global oil prices has not yet been fully reflected and may subsequently depress prices in oil-related upstream and midstream industries.
- Comparison
- Coal prices have outperformed oil-related industries, indicating differentiation even within upstream sectors.
- Risks
- Oil prices may rise again due to factors such as sanctions on Iran, potentially reigniting cost pressures.
Key data
- June CPI YoY1.0%Below the Bloomberg expectation of 1.1% and HSBC's expectation of 1.2%.
- June PPI YoY4.1%In line with Bloomberg and HSBC expectations, partly affected by base effects.
- Communications Equipment Prices YoY7.6%AI-related demand drove further increases in the prices of mobile phones and other communications equipment.
- Tourism Prices YoY4.5%Policy support for services consumption and increased Dragon Boat Festival spending drove tourism prices higher.
- Coal Mining Prices MoM5.6%Influenced by anti-involution measures, safety inspections, and increased demand due to high temperatures.
- Coal Mining Prices YoY20.6%The report estimates that its contribution to year-on-year PPI increased from 0.2 percentage points in May to approximately 0.4 percentage points.
- Electrical Machinery Industry Prices YoY5.1%Prices in areas such as solar panels and lithium-ion batteries improved, driven by anti-involution policies.
- PPI Weight of Computer, Communications and Electrical Machinery IndustriesApproximately 21%Based on estimated 2025 sales revenue, further price increases in the two industries will continue to support overall PPI.
Impact & implications
For investment and macroeconomic analysis, stronger PPI reflects price factors in upstream industries and selected manufacturing sectors more than a broad recovery in consumer demand. If falling global oil prices gradually pass through and upstream price momentum weakens, industrial price pressures may ease in the third quarter. However, if household confidence and services consumption fail to improve sustainably, CPI may continue to lack significant upside.
Risks
- Global oil prices rise again due to geopolitical developments or changes in sanctions.
- Insufficient recovery in domestic demand and household confidence causes CPI to lack sustained upward momentum.
- Downstream industries continue to absorb costs, pressuring margins and limiting price pass-through.
- AI-related demand or the effects of anti-involution policies are weaker than expected, reducing support for PPI.
What to watch
- Whether year-on-year PPI declines in the third quarter as expected by the report.
- The pace at which changes in global oil prices pass through to China's upstream and midstream industries.
- Whether adjustments in pork supply drive a year-on-year recovery in pork prices after approximately three quarters.
- Whether services consumption, tourism prices, and household confidence can support core CPI.
- The continued impact of anti-involution policies on prices in coal, electrical machinery, photovoltaic, and lithium battery industries.