Arjen van Dijkhuizen, the senior economist at ABN AMRO, notes that CPI inflation in China was stable at 2.7% yoy in June, and still below the 3% ‘target’ following a pick-up in preceding months driven by swine flu effects on food prices.

• “Food price inflation jumped from 0.7% yoy in February to 8.3% in June, the highest level since January 2012. Core inflation has been quite stable, coming in unchanged at 1.6% yoy in June.
• Meanwhile, producer price inflation has fallen back again, to 0.0% yoy in June, after a short-lived pick-up in March/April. That is putting downward pressure on industrial profits and leads to higher debt repayment pressures. Falling producer prices in China also have the potential to spark global deflation fears.
• We should add that the current developments are not at all comparable with the sharply negative PPI numbers in 2012-2016 (during the commodity slump). All in all, we think that the latest inflation figures are in line with our view that the PBoC will continue with easing monetary policy through (significant) RRR cuts and (modest) rate cuts as well as through targeted measures to support bank liquidity and bank lending, particularly to the private sector.”