After the Oil Price Shock Fades, Weak Demand Again Dominates China’s Inflation

Overview

The report analyzes China’s inflation data for July 2026. Both CPI and PPI were below market expectations, as the reversal of the oil price shock, adverse weather, and persistently weak domestic demand jointly contributed to weaker data. Although earlier increases in energy and technology product prices lifted annual PPI and GDP deflator forecasts, downstream pricing remains subdued. The report continues to judge that PPI will follow a weakening path and believes growth pressure in the third quarter remains present.

Core views

First, the weakening of July inflation was not merely a weather disturbance; core CPI below 1%, a narrow scope of PPI price increases, and subdued downstream prices together point to insufficient domestic demand. Second, the PPI rebound from March to May was mainly driven by imported energy costs, while technology product price increases provided only localized support and did not create broad-based reflation. Third, domestic oil prices may temporarily stabilize in August as they lagged in reflecting the rebound in international oil prices in July, but as global oil supply normalizes, subsequent downward pressure is expected to resume. Fourth, PMI and inflation data jointly indicate that growth remains weak in the third quarter, and if conditions deteriorate further in August, the probability of further easing in September to October will rise.

Analysis framework

The report compares actual inflation data with market consensus expectations and identifies price drivers across subcategories such as core CPI, food, tourism services, non-technology goods, medical services, energy, metals, and automobiles. It also uses seasonally adjusted annualized month-over-month rates, year-over-year changes, and percentage-point contributions by industry to PPI to distinguish short-term disturbances such as weather from structural factors such as insufficient demand, energy inputs, and technology product price increases, thereby adjusting annual forecasts and assessing the policy outlook.

Methodology notes

• Macro Data AnalysisComparison of Actual Values with Consensus Expectations

  Assess the degree of surprise in economic data by comparing actual inflation figures with market consensus expectations.

  July CPI at 0.5% year over year was below the market expectation of 0.8%, and PPI at 3.5% year over year was below the market expectation of 3.8%, constituting an overall weaker-than-expected inflation surprise.

• Inflation AttributionSubcategory Contribution Analysis

  Break down the sources of price changes by subcategories such as energy, technology products, food, services, and industrial goods.

  The report notes that oil price normalization is an important reason for the PPI pullback, technology product price increases provide some offset, but weakness is broader in automobiles, metals, and other downstream areas.

• Trend AnalysisSeasonally Adjusted Annualized Month-over-Month Rate

  Use monthly seasonally adjusted annualized rates to observe recent momentum in core prices.

  From May to July, the average seasonally adjusted annualized month-over-month rate of core CPI was only 0.3%, with July at 0.4%, indicating that recent core inflation momentum remains weak.

• Scenario AnalysisPolicy Reaction Function

  Evaluate the probability of subsequent policy easing based on changes in growth and inflation data.

  The report believes that if August data weaken further, the likelihood of additional easing in September to October will increase.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinese Interest Rate Bonds

  Weak growth and core inflation increase the possibility of further easing.

  Strengths

  If additional easing occurs in September to October, interest rate bonds may benefit from expectations of lower rates.

  Weaknesses

  The report does not provide a clear interest rate path or bond trading recommendation.

  Comparison

  Compared with risk assets, interest rate bonds have a more direct directional relationship with an environment of weak growth and low core inflation.

  Risks

  A temporary rebound in oil prices in August or weaker-than-expected policy easing could reduce the positive impact.

• Chinese Equities

  Weak domestic demand suppresses corporate revenue, pricing power, and cyclical sector earnings, but expectations of policy easing may provide some valuation support.

  Strengths

  Price increases in chip-related electronic products and medical service price reforms provide localized support.

  Weaknesses

  Automobiles, tourism services, non-technology goods, and broader downstream pricing showed weak performance.

  Comparison

  Price performance in technology and medical services is better than in most traditional cyclical and consumption-related areas.

  Risks

  Persistently weak growth in the third quarter, insufficient policy transmission, and a slow recovery in demand.

• Industrial Metals

  Metal prices are affected by insufficient demand and weather disturbances.

  Strengths

  The report does not provide clear evidence of demand improvement.

  Weaknesses

  Non-ferrous metals were led lower by aluminum, and ferrous metals also weakened due to weak demand.

  Comparison

  Industrial metals performed weaker than some technology products supported by chip price increases.

  Risks

  Further weakening in demand may prolong price pressure, while supply or policy changes could bring opposite volatility.

• Crude Oil and Oil Price-Related Industries

  Changes in oil prices are the main external driver of recent PPI fluctuations.

  Strengths

  Domestic oil prices may lag in reflecting the rebound in international oil prices in July and temporarily stabilize or rise in August.

  Weaknesses

  Further normalization of global oil supply is expected to bring renewed downward pressure.

  Comparison

  Energy has a significantly larger impact on PPI than most downstream industries, but the reflation it drives is less sustainable.

  Risks

  Global supply, geopolitical events, and lags in domestic price transmission may lead to forecast deviations.

Key data

• July CPI YoY0.5%Below the market consensus expectation of 0.8%.
• July PPI YoY3.5%Below the market consensus expectation of 3.8%.
• July PPI MoM-0.7%Reflects the reversal of the oil price shock and persistently weak demand.
• Average seasonally adjusted annualized MoM core CPI from May to July0.3%July alone was 0.4%, and core inflation momentum remains subdued.
• Cumulative contribution of oil prices to PPI from March to May2.2 percentage pointsOnly 0.9 percentage points of this was reversed in June to July.
• Contribution of oil price-related industries to overall PPI in July-0.6 percentage pointsIt was negative 0.3 percentage points in June, indicating a larger drag.
• 2026 PPI forecast2.0%Raised by 0.5 percentage points, mainly reflecting earlier increases in oil prices and technology product prices rather than a strengthening future path.
• 2026 GDP deflator forecast0.8%Raised by 0.3 percentage points.

Impact & implications

Weak core inflation and downstream pricing imply that corporate pricing power and nominal growth remain under pressure, increasing the possibility of subsequent macro policy easing. For assets, easing expectations may support Chinese interest rate bonds, but insufficient demand is unfavorable for industrial metals, cyclical sectors, and earnings of companies dependent on domestic consumption. The short-term impact of oil prices on PPI may still cause monthly volatility, but it does not change the medium-term weakening direction judged by the report.

Risks

• Adverse weather may have exaggerated the weakness in July tourism services and some industrial activity.
• Domestic oil prices lag in reflecting the rebound in international oil prices, which may cause PPI to briefly stabilize or rebound in August.
• If the pace of global oil supply normalization deviates from expectations, it may change the path of PPI decline.
• If price increases in chip-related products spread or persist for longer, they may partly offset broader price weakness.
• If pork prices have bottomed and rise significantly, food inflation may be higher than the current assessment.
• The timing and magnitude of policy easing are uncertain, and weak data do not necessarily translate into the expected policy actions.

What to watch

• Whether August CPI, core CPI, and PPI continue to be weaker than expected.
• Whether domestic refined oil products and prices in oil price-related industries show a lagged rebound.
• Whether chip price increases can spread to a broader range of electronic products and downstream industries.
• Pricing changes in automobiles, tourism services, industrial metals, and other domestic demand-sensitive areas.
• The impact of pork, fruit, and egg prices on food inflation.
• Whether further monetary or macro policy easing measures are introduced in September to October.
• Whether PMI and third-quarter growth indicators continue to show weak economic momentum.