China Inflation Remains Below Annual Target

China’s consumer inflation remained below the government’s goal in July and factory-gate deflation persisted, suggesting policy makers still have room for monetary easing amid a lack of pressure on prices.

The consumer price index rose 2.3 percent from a year earlier, the National Bureau of Statistics said in Beijing yesterday, the same pace as in June and also the median estimate in a Bloomberg News survey. Factory-gate prices fell 0.9 percent, matching projections and extending the longest stretch of declines since 1999.

Subdued inflation gives Communist Party leaders leeway to roll out more measures to support the economy after authorities expedited railway spending and freed up money for loans to counter a slowdown earlier in the year. The unexpected decline in imports in July reported Aug. 8 partly reflects sluggish investment, Royal Bank of Scotland Group Plc said.

“July inflation data should ease any concerns policy makers and investors may have had about rising sequential inflation amid the economic growth rebound,” Goldman Sachs Group Inc. economists led by Beijing-based Song Yu said in a note after the report. “The downward trend shown by food and non-food CPI will leave room for policy makers to maintain relatively supportive policy in the near future.”

Analysts’ estimates for consumer inflation ranged from 2 percent to 2.6 percent. Projections for the decline in producer prices ranged from 0.6 percent to 1.4 percent, with a median of 0.9 percent, following June’s 1.1 percent drop.

Improving Trend

Producer prices fell for the 29th straight month, the longest run of declines since 31 months from 1997 to 1999. At the same time, the July drop was the smallest since April 2012, a trend that the statistics bureau said yesterday shows an improving supply-demand situation in industrial markets.

The Shanghai Composite Index rose 0.4 percent last week, the fourth straight gain, after export growth unexpectedly accelerated in July. The yuan strengthened 0.38 percent against the dollar during the week, the biggest advance in almost two months, as China reported a record monthly trade surplus.

Downward pressure on some prices will continue amid antitrust investigations by the nation’s top economic-planning agency. Toyota Motor Corp. and Honda Motor Co.’s Chinese ventures last week joined Bayerische Motoren Werke AG, Daimler AG’s Mercedes-Benz, and Volkswagen AG’s Audi brand in announcing a cut in prices of spare parts after the National Development and Reform Commission said it was probing whether automakers manipulated prices.

Government Goal

The government’s goal is to keep consumer-price increases within about 3.5 percent this year while achieving economic growth of about 7.5 percent, Premier Li Keqiang announced in March.

The housing component of the CPI, which includes rental costs, utilities and building materials, rose 2 percent from a year earlier in July, the smallest increase in two years.

“Domestic demand is still fairly weak, especially with property in a down cycle, so for the rest of this year I’m not really worrying about inflation pressure,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong.

Trade data released by the General Administration of Customs on Aug. 8 showed overseas shipments rose 14.5 percent in July from a year earlier and imports fell 1.6 percent. Surges in sales to the U.S. and European Union, China’s biggest markets, indicate demand from abroad will help sustain expansion.

Upward Pressure

The People’s Bank of China said this month that a continuous rebound in aggregate demand may “add upward pressure on prices.” “We still have to pay attention to the dynamic changes in future prices,” the central bank said in a quarterly monetary-policy report released Aug. 1.

Australia & New Zealand Banking Group Ltd. economists said a gauge of online consumer prices from Alibaba Group Holding Ltd. has been negative for two years and deflation risks may rise if growth momentum weakens.

“China’s inflation outlook remains mild,” Liu Li-Gang, ANZ’s chief Greater China economist in Hong Kong, said in a note after the data. “Monetary conditions should remain relaxed in general in the next two quarters.”

The factory-gate price figures follow an increase in an official manufacturing index to the highest level in more than two years. At the same time, a private gauge of services dropped to a record low, hurt by a real-estate slump that’s seen some developers delay sales and cut prices.

The statistics bureau is scheduled Aug. 13 to release figures on industrial output and retail sales for July and fixed-asset investment for the first seven months. The central bank will publish credit and money-supply numbers by the middle of the month.

— With assistance by Xin Zhou, and Nerys Avery

Before it's here, it's on the Bloomberg Terminal.