CPI falls, but demand to recover soon

China's consumer prices dropped year-on-year in July for the first time since early 2021 while factory-gate prices continued to decline, increasing the urgency for policymakers to take more steps to boost domestic demand and support growth, said analysts.

Meanwhile, they noted that month-on-month growth in July's consumer inflation points to a gradual improvement in domestic demand, adding that inflation will return to a reasonable range in the following months with steady economic recovery and stronger policy support.

To address still-weak demand, they said the country may roll out a package of pro-growth measures ranging from spurring consumption to stepped-up financial support for micro and small businesses.

Their comments came as data from the National Bureau of Statistics showed on Wednesday that the consumer price index, a main gauge of inflation, fell 0.3 percent year-on-year in July following a flat reading in June. The decline marks the first drop since February 2021.

Dong Lijuan, an NBS statistician, said the CPI dropped year-on-year due to a high comparison base in the previous year.

"The (year-on-year) decline in consumer prices is temporary," Dong said in a statement published on NBS's official website on Wednesday.

Looking ahead, Dong said the CPI is likely to gradually rise with the economic recovery, a steady rebound in market demand, the continued improvement in the supply-demand situation and fading base effects.

"The negative inflation does not mean deflation for China," said Zhou Maohua, an analyst at China Everbright Bank.

He expects consumer inflation to increase in the following months with the improvement in demand and stronger policy support, providing room for more stimulus to shore up the economy.

On a month-on-month basis, July's CPI rose 0.2 percent, up from a 0.2 percent decline in June.

The so-called core CPI, which excludes volatile food and energy prices, rose by 0.8 percent year-on-year in July, up from a 0.4 percent rise in June, according to the NBS.

Lu Ting, chief China economist at Nomura, said his team expects consumer prices to drop at a slower pace with a 0.1 percent year-on-year decline in August, given that data showed that services price inflation remained robust in the summer and some food prices started to rebound in August due partially to the flooding in northern China.

The producer price index, which gauges factory-gate prices, was down 4.4 percent from a year earlier in July after the 5.4 percent annual contraction in June, the NBS said.

Wen Bin, chief economist at China Minsheng Bank, said he expects the contraction in the PPI to continue to narrow with a lower base.

"China's core inflation has remained at historically low levels since the beginning of this year, pointing to still-weak domestic demand," Wen said.

However, he said, with a package of recently released countercyclical policy measures, China will likely witness a rebound in domestic demand and a gradual return of core inflation to its average levels.

NBS data showed the official purchasing managers' index for China's manufacturing sector remained in the contraction zone for the fourth consecutive month.

Xiong Yuan, chief economist at Guosheng Securities, said the country is set to take more steps to stabilize the overall economy, with a focus on boosting market confidence, expanding domestic demand, spurring consumption and stabilizing the property sector.

Lu, from Nomura, said his team expects the People's Bank of China, the nation's central bank, to deliver two more rounds of rate cuts of 10 basis points each, as well as a 25-basis-point reserve requirement ratio cut before the end of the year.