China June CPI falls, PPI rises, but underlying inflation remains weak

Overview

The report analyzes China's June 2026 inflation data. June CPI year-on-year declined to 1.0%, driven mainly by falling global oil and gold prices; food remains a drag, with pork prices continuing to fall sharply. June PPI year-on-year rose to 4.1%, a relatively high reading since July 2022, but the rise is concentrated in upstream industries and base effects, with month-on-month now negative, indicating inflation has not spread widely through the economy.

Core views

The core views are: (1) headline inflation is clearly affected by external commodity prices, with oil, gold, and chip prices contributing significantly to CPI and PPI; (2) after excluding energy, gold, and AI-related materials, underlying inflation remains weak, and demand-side price pressure is limited; (3) the PPI rise is mainly concentrated in upstream sectors, while downstream consumer goods inflation remains negative; (4) July CPI is expected to fall further to 0.8% while PPI stays around 4.1%; and (5) policy is expected to remain accommodative with stronger fiscal support, but no RRR cuts or interest-rate cuts for the year.

Analysis framework

The report combines year-on-year, month-on-month, component contribution, and sector decomposition methods, breaking CPI into parts such as energy, gold, food, core goods, and services, while decomposing PPI into upstream, raw materials, manufacturing, downstream consumer goods, and specific industries. The analysis also combines NBS, MARA, NDRC, and high-frequency commodity price data to assess the impact of oil, gold, pork, eggs, chips, and refined oil repricing on inflation.

Methodology notes

• Macroeconomic Inflation AnalysisCPI Component Decomposition

  Explains overall CPI changes by decomposing it into components such as oil, gold, food, core CPI, and services inflation.

  The report states that the combined positive contribution from oil and gold to headline CPI fell by 0.23 percentage points from May, so the June CPI decline can mainly be explained by lower prices in these two categories.

• Macroeconomic Inflation AnalysisPPI Sector Contribution Decomposition

  Attributes year-on-year PPI changes by upstream, downstream, and specific industrial sectors.

  The report estimates that oil-related industries added 1.6 percentage points to June PPI, nonferrous-metal industries added 1.7 percentage points, and chip-related high-tech manufacturing added 0.4 percentage points.

• Macroeconomic ForecastBase-Effect and High-Frequency Price Tracking

  Combines year-ago comparables, intra-month high-frequency food prices, Brent oil, and refined-oil repricing to forecast July inflation.

  The report believes July CPI will be dragged lower by lower contributions from food, energy, and gold, while PPI will stay around 4.1% as lower oil prices and base effects offset each other.

Asset mapping & comparison

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

• Chinese sovereign bonds

  Low inflation and an accommodative policy environment generally support bonds, though the report expects no RRR cuts or interest-rate cuts this year.

  Strengths

  Underlying weak inflation, weak domestic demand, and accommodative policy orientation favor keeping rates lower.

  Weaknesses

  Liquidity is already relatively abundant and sovereign yields are already low, limiting the scope for further rate cuts.

  Comparison

  Compared with headline PPI appearing stronger, the report emphasizes underlying inflation weakness after removing external prices.

  Risks

  If oil prices rebound persistently and push up inflation expectations, further downward rate movement could be constrained.

• Oil and energy complex

  Oil prices are a key driver of the energy component of CPI and the upstream component of PPI.

  Strengths

  If geopolitics drives oil prices to continue rebounding, energy-related inflation would rise.

  Weaknesses

  The June oil price decline has already reduced contribution from gasoline and oil-related industries.

  Comparison

  Brent returned to about USD70/bbl in early July, then rose to about USD78/bbl on July 8 amid geopolitical tensions.

  Risks

  A sustained sharp oil price increase would present upside risk to July and later PPI and CPI forecasts.

• Gold and gold-related consumer goods

  Gold prices influence gold-related product prices within core CPI.

  Strengths

  Gold prices remain higher year-on-year, contributing positively to core CPI.

  Weaknesses

  Inflation in gold-related products has been easing from a high level since early in the year, down to 28.1% year-on-year in June.

  Comparison

  Year-on-year gold-related product inflation fell gradually from 77.4% in January, 76.6% in February, 65.8% in March, to 28.1% in June.

  Risks

  If gold prices move up again, core CPI readings could rise again.

• Chinese consumer goods and downstream manufacturing

  Downstream PPI and food prices indicate that terminal demand remains weak.

  Strengths

  Some specific foods, such as eggs, rose in price due to supply constraints.

  Weaknesses

  Food inflation, pork prices, and downstream consumer-goods PPI remain negative, showing insufficient demand-side price pressure.

  Comparison

  Upstream PPI year-on-year is 5.5%, while downstream consumer-goods PPI year-on-year is -0.9%, showing clear divergence across the value chain.

  Risks

  If domestic demand does not improve, upstream price increases may not translate into corporate profits and end-consumer demand.

Key data

• June CPI year-on-year1.0%1.2% in May; market consensus was 1.1%, and Nomura's estimate was 1.2%.
• June CPI month-on-month-0.3%-0.1% in May; -0.1% in June 2025.
• Underlying CPI excluding oil and goldaround 0.4%The report says underlying inflation is broadly stable.
• June core CPI year-on-year1.0%1.1% in May; around 0.83% excluding gold.
• June food inflation-1.6%-1.7% in May; food remains a drag on CPI.
• June pork inflation-15.9%Contributed about -0.3 percentage points to headline CPI.
• June gasoline year-on-year price change17.0%23.5% in May; contributed 0.51 percentage points to headline CPI.
• June gold-related products price year-on-year28.1%39.0% in May, down sharply from early-year levels.
• June PPI year-on-year4.1%3.9% in May; market consensus was 4.1%, and Nomura's estimate was 4.0%.
• June PPI month-on-month-0.3%0.5% in May, indicating price pressure eased after oil prices declined.
• Upstream sector PPI year-on-year5.5%5.2% in May; contributed 4.28 percentage points to overall PPI.
• Downstream consumer goods PPI year-on-year-0.9%-0.8% in May; indicates price pressure on the consumer side remains weak.
• 2026 CPI forecast0.9%Nomura raised its forecast from 0.6% to 0.9% at the beginning of June.
• 2026 PPI forecast2.5%Nomura raised its forecast from 1.0% to 2.5% at the beginning of June.
• July CPI forecast0.8%Expected to be supported in part by food and limited drag from energy and gold contributions.
• July PPI forecast4.1%Expected that falling oil prices will largely offset the low-base effect from last year.

Impact & implications

The market implication is that headline PPI strength should not be interpreted as broad re-inflation, as price increases are concentrated in the upstream and external commodity chain while downstream consumer goods remain weak. Macroeconomic policy still needs to support domestic demand, and fiscal expansion and a loose monetary environment may continue; however, with abundant market liquidity and already low sovereign yields, the need for further reserve-requirement ratio or interest-rate cuts is limited. In commodities, oil and gold remain the key near-term shock variables for inflation forecasts.

Risks

• Global oil prices rebound due to geopolitical tensions and continue to rise, lifting CPI energy and upstream PPI components.
• Gold prices move up again, expanding gold’s contribution to core CPI.
• Chip and AI-related material prices continue to rise, lifting PPI and some communication equipment prices.
• Abundant pork supply and weak demand continue to suppress food prices, pushing CPI further below expectations.
• Upstream price increases fail to pass through to downstream sectors, putting pressure on industrial profits and end demand.

What to watch

• Whether Brent oil in July stays around USD78/bbl or continues rising.
• Whether NDRC adjusts domestic refined-oil retail prices again.
• MARA high-frequency agricultural commodity prices, especially pork, eggs, and the food basket.
• Whether upstream PPI prices spread into downstream consumer-goods sectors.
• The pace at which Beijing accelerates fiscal spending and rolls out domestic-demand support policies.
• Whether Chinese sovereign yields and market liquidity continue to limit the space for RRR cuts and rate cuts.