China CPI and PPI inflation Report Interpretation

Overview

This macro update explains why China’s July CPI and PPI inflation fell more than expected and assesses the implications for policy. Nomura argues that the immediate driver was the delayed pass-through from lower global oil prices, while subdued domestic demand—linked to the property downturn—continues to limit underlying inflation.

Core views

China’s July CPI inflation fell by 0.5 percentage points to 0.5% year-on-year, below both consensus and Nomura’s 0.8% forecasts and down from 1.0% in June. PPI inflation also slowed more than expected, to 3.5% year-on-year from 4.1%, versus consensus of 3.8% and Nomura’s 4.1% forecast. Nomura attributes both misses largely to the lagged effect of the substantial global oil-price pullback in June. Excluding oil, CPI would have been 0.44% year-on-year in July, only slightly below June’s 0.49%; excluding external influences including oil, non-ferrous metals and chips, PPI would have been unchanged at 0.4% year-on-year. Oil was the main mechanism behind the CPI decline. Domestic gasoline prices fell 10.7% month-on-month in July after declines of 4.9% in June and 0.3% in May. Gasoline’s contribution to headline CPI dropped to -0.35 percentage points in July from -0.15 percentage points in June, while year-on-year gasoline inflation slowed to 1.0% from 17.0%. Oil’s contribution to headline CPI was 0.45 percentage points lower than in June. July headline CPI was -0.1% month-on-month, well below the usual seasonal rebound; excluding oil, Nomura estimates sequential CPI would have been about 0.25%, close to the 0.28% reading a year earlier. Underlying domestic inflation remained soft. Food inflation was -1.5% year-on-year in July, little changed from -1.6% in June, and pork remained a material drag at -13.3% year-on-year despite a 4.1% month-on-month price rebound. Nomura cites a continuing supply glut: hog slaughter growth accelerated to 27.1% year-on-year in June from 21.6% in May, and it expects downward pressure on pork prices to remain entrenched. Non-food inflation fell to 0.9% from 1.5%, core CPI eased to 0.9% from 1.0%, and services inflation moderated to 0.7% from 0.8%. Medical services were an exception, rising 4.3% year-on-year and contributing 0.28 percentage points to headline CPI, while weaker summer travel demand limited the contribution from travel-related prices. Other components provided only limited support. Gold-related product prices rose 24.6% year-on-year, but the pace slowed from 28.1% in June; with gold’s estimated 0.6% weight in the core CPI basket, Nomura estimates it contributed 0.15 percentage points to core CPI. Excluding gold, core CPI would have been 0.75% year-on-year, down from 0.83% in June. Higher chip prices lifted prices of computers, tablets and mobile phones, but their combined contribution to headline CPI was only 0.14 percentage points year-on-year. Nomura also notes that the trade-in programme’s payback effect pushed home-appliance inflation down to 0.2% year-on-year from 2.2%. PPI’s slowdown was concentrated in upstream industries, indicating that disinflation had not yet broadly diffused through the economy. Upstream PPI inflation fell to 4.8% year-on-year from 5.5%, with raw-material inflation declining to 6.1% from 8.6%; manufacturing PPI was broadly steady at 3.1% from 3.0%. Downstream consumer-goods PPI remained negative at -0.8%, underscoring muted consumer-side price pressure. Petroleum and natural-gas extraction PPI fell sharply to 3.2% from 16.8%, while petroleum, coal and other fuel-processing inflation declined to 8.2% from 16.7%. Non-ferrous metals smelting and pressing moderated to 20.2% from 23.4%, and ferrous metals smelting and pressing eased to 2.7% from 3.1%. For August, Nomura expects the delayed effect of July’s oil-price rebound to lift CPI and PPI marginally to 0.6% and 3.6% year-on-year, respectively, but stresses significant uncertainty. Brent rose to USD105 per barrel on 23 July amid renewed Middle East tensions before retreating to around USD90 in early August. The NDRC raised retail petrol prices by RMB685 per tonne on 1 August after a RMB300-per-tonne increase on 18 July, though Nomura says a mid-August retail-price cut would be likely if prevailing oil prices persist. Gold’s 7.7% first-week-of-August gain could also affect CPI if sustained. Despite the oil shock and the global AI boom, Nomura judges underlying inflation to be stubbornly subdued because of persistent downward pressure from the property downturn. It expects Beijing to step up growth-supportive measures in the second half after the Q2 slowdown, relying more on fiscal measures. However, it maintains that the PBoC is unlikely to cut policy rates this year because other major central banks face pressure to raise rates. An RRR cut remains a possible tool to accommodate potentially increased government-bond issuance, but is not Nomura’s base case and would be expected to have almost no impact on interest rates or credit demand.

Analysis framework

Nomura compares July CPI and PPI with June readings and market and in-house forecasts, then decomposes the inflation changes by oil, food, gold, consumer goods, services, and upstream and downstream producer-price sectors. It combines high-frequency commodity and food-price indicators with the policy backdrop to form its August inflation outlook and monetary-policy view.

Methodology notes

• Industry AnalysisVolume-price decomposition

  Inflation component and sector contribution analysis

  The report separates CPI and PPI movements into oil, food, gold, consumer goods, services, and upstream and downstream industrial components to identify what drove the headline changes.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Upstream-to-downstream price transmission

  Nomura examines whether lower commodity and energy prices have spread from upstream PPI sectors into manufacturing and consumer-goods prices, concluding that the July slowdown remained concentrated upstream.

Key data

• July CPI inflation0.5% y-o-yDown from 1.0% in June; below 0.8% consensus and Nomura forecasts.
• July PPI inflation3.5% y-o-yDown from 4.1% in June; below 3.8% consensus and Nomura’s 4.1% forecast.
• August CPI and PPI forecast0.6% and 3.6% y-o-yNomura expects a marginal rebound on the delayed effect of July’s oil-price increase.
• July domestic gasoline prices-10.7% m-o-mThe decline reduced gasoline’s contribution to headline CPI to -0.35 percentage points.
• July pork inflation-13.3% y-o-yStill a -0.25 percentage-point drag on headline CPI despite a 4.1% month-on-month rebound.
• Upstream PPI inflation4.8% y-o-yDown from 5.5% in June; the PPI slowdown was concentrated upstream.

Impact & implications

Nomura interprets the July data as evidence that headline disinflation was primarily an oil-price effect rather than a major deterioration in the underlying trend, although domestic inflation remains weak. The report sees fiscal support as the more likely policy response to slower growth, with neither a policy-rate cut nor an RRR cut as its base case.

Risks

• Nomura’s August CPI and PPI forecasts face significant uncertainty because global oil prices remain highly volatile amid a fluid Middle East situation.
• A sustained rebound in gold prices could add to CPI inflation.
• Persistent property-sector weakness and excess pork supply could keep underlying inflation subdued.

What to watch

• The path of Brent oil prices and whether domestic retail petrol prices are reduced in mid-August.
• Whether the recent increase in gold prices is sustained and feeds into CPI.
• Pork supply conditions, hog slaughter growth, and food-price indicators.
• Potential growth-supportive fiscal measures and any RRR action tied to government-bond issuance.