Signs of an inflation turning point emerge: CPI cools, PPI peaks out, and expectations for steady economic growth rise again

On July 9, the National Bureau of Statistics released data showing that in June, China’s CPI rose 1.0% year over year, lower than the previous reading of 1.2% and the market expectation of 1.1%; on a month-over-month basis, it fell 0.3%, with the decline further widening from May’s -0.1%. Core CPI also fell to 1.0%, with two consecutive months of decline and a month-over-month drop of 0.1%. PPI continued to rise to 4.1% year over year, reaching the highest level since 2022, up slightly by 0.2% from the prior value; however, on a month-over-month basis it fell 0.3%, the first time it turned negative since July last year, a sharp decline of 0.8 percentage points from the prior +0.5%.

Despite inflation still appearing to maintain a “weak CPI and strong PPI” pattern on the surface, judging from month-over-month changes and price momentum, the re-inflationary rally driven by the Middle East conflict’s energy price increases and the AI industry chain’s improving sentiment has begun to fade. This month, PPI year over year is boosted mainly by last year’s low base and higher international energy prices in Q2; but the month-over-month figures have returned to negative territory, indicating that as international oil prices pull back, upstream industrial product prices are cooling, and the incremental pressure from external imported inflation has clearly weakened. PPI year over year may already be in a peak area.

Imported inflation is receding, and domestic fundamentals return to price-setting dominance

Structurally, due to the continued expansion of global AI capital spending, industries related to the AI industry chain—such as electronic equipment, communication equipment, and semiconductors—continue to provide important support to PPI. However, as the geopolitical risk premium in the crude oil market declines rapidly, the month-over-month prices of energy-related industries in China, such as petroleum and chemicals, fall across the board, and the pull of energy on industrial product prices has clearly weakened. By contrast, improvement in downstream consumer goods prices remains limited: the PPI for consumer necessities is still in negative growth territory, and price increases have not yet spread to end-consumer demand.

CPI continues to run moderately. Food prices remain suppressed by ample pork supply; the decline in energy and gold prices has narrowed the rise in non-food prices. Core CPI also falls in tandem, indicating that the recovery in residents’ consumption demand is still relatively weak. This round of price rebound is driven more by supply-side factors than by an improvement in residents’ demand.

But the PPI-CPI spread has widened further to 3.1 percentage points, with no improvement in the price transmission bottleneck between upstream and downstream. The pressure on profits at midstream and downstream companies continues. Core CPI continues its downward trend, and the PPI for consumer necessities also remains weak, suggesting that companies’ ability to pass costs down to downstream remains limited, and insufficient domestic demand is still a key feature of economic operation.