China’s Consumer Inflation Rises in August, Driven by Weather-Related Food Price Increases
China’s consumer inflation surged in August, reaching its fastest pace in six months. However, the rise was largely driven by higher food costs due to weather disruptions rather than a recovery in domestic demand, as producer price deflation continued to worsen.
The slow start to the second half of the year is increasing pressure on China, the world’s second-largest economy, to implement more policies. The country is grappling with a prolonged housing market downturn, rising unemployment, debt challenges, and escalating trade tensions.
According to data from the National Bureau of Statistics (NBS) released on Monday, the Consumer Price Index (CPI) rose 0.6% year-on-year in August, compared to a 0.5% rise in July. While this was slightly lower than the 0.7% forecasted by a Reuters poll, the increase was mainly driven by weather-related food price hikes.
Extreme weather events this summer, including deadly floods and intense heat, have driven up the prices of farm produce, pushing inflation higher. State media reported that natural disasters affected 1.46 million hectares of crops in August alone.
“The higher CPI in August was mainly due to high temperatures and heavy rains,” said NBS statistician Dong Lijuan.
Food prices surged 2.8% year-on-year in August, compared to no change in July, while non-food inflation eased to 0.2%, down from 0.7% the previous month.
However, the overall inflation rebound was weaker than expected and did little to alleviate concerns about deflation. “Much of the improvement has been due to food price increases, which are vulnerable to fluctuating weather and supply conditions,” said Junyu Tan, North Asia Economist at Coface.
Core inflation, which excludes volatile food and fuel prices, fell to 0.3% in August, its lowest in nearly three and a half years, down from 0.4% in July.
On a month-to-month basis, consumer inflation increased by 0.4% in August, compared to a 0.5% rise in July. This was below economists’ expectations of a 0.5% gain.
In response to the inflation data, China’s yuan weakened against the U.S. dollar, and long-term yields hit record lows, adding to concerns about the economy and fueling calls for further monetary easing. Chinese stock markets also closed lower in morning trading.
In unusually direct remarks, China’s former central bank governor Yi Gang called for stronger efforts to counter deflationary pressures during a speech at the Bund Summit in Shanghai last week.
Efforts to stimulate consumer confidence through a national campaign, including the earmarking of $41 billion in ultra-long treasury bonds for equipment upgrades and consumer goods trade-ins, have had a lukewarm impact. Domestic car sales, for example, declined for the fourth consecutive month in July.
“These policies will take time to show results, so a demand-led recovery in inflation is not yet in sight,” said Tan.
Meanwhile, China’s Producer Price Index (PPI) fell by 1.8% year-on-year in August, marking the largest drop in four months. This was a sharper decline than the 0.8% drop in July and worse than the 1.4% fall anticipated by economists.
“The ongoing deflationary pressures are largely due to a surplus in production, which continues to outpace demand,” Tan explained.
Gabriel Ng, assistant economist at Capital Economics, echoed this concern, stating, “Increased fiscal spending might drive domestic demand in the coming months, but government policies remain overly focused on investment, which could ultimately exacerbate the overcapacity issue.”
Weak economic activity has led global financial institutions to revise down their growth forecasts for China in 2024, with expectations falling below the government’s target of around 5%.
A central bank official noted on Thursday that China has room to reduce the amount of cash banks are required to hold in reserves, signaling potential policy adjustments in the near future.
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