China’s consumer inflation hits two-year high on pork rally

China’s consumer prices grew faster than expected in June, partly driven by a rebound in pork prices, although the government’s Covid Zero strategy continued to depress demand. Factory-gate inflation moderated on cooling commodity prices. 

Consumer prices grew 2.5% last month from a year earlier, beating economists’ expectations of a 2.4% gain, the National Bureau of Statistics data showed Saturday. That is the strongest pace in two years and compares with 2.1% growth in May.

The producer price index, meanwhile, rose 6.1%, though lower than May’s 6.4%. 

“China’s June inflation data signal slack demand,” Eric Zhu of Bloomberg Economics wrote on Saturday. “Core prices outside food and energy barely budged -- a sign that Covid Zero restrictions continue to stifle spending on services.”

While growth in consumer prices is accelerating amid rising costs of pork and energy, inflation is unlikely to become a crisis for China’s central bank similar to that facing its western peers. Consumer demand remains depressed by the nation’s strict Covid control polices and sporadic outbreaks. 

The state economic planner has moved to contain the fast increase in pork prices, a key product in China’s CPI basket, with measures including studying selling pork from state reserves and asking hog farmers not to hoard supplies. 

The consensus now is for CPI to rise 2.2% for the full year, well below the government’s target of keeping it around 3%, although some economists expect it to surge above the threshold at some point in the second half of the year. 

Pork prices fell at a slower pace of 6% in June, following a 21.1% drop in May. On a month-on-month basis, prices of the meat grew 2.9%. 

Core inflation, which removes the more volatile food and energy prices, rose 1%, faster than May’s 0.9% increase.

Improvement in June

China’s economy showed some early signs of improvement in June, as Covid outbreaks and lockdowns eased. But high-frequency data suggest the economy contracted in the second quarter. Fresh virus flareups in parts of the eastern province of Anhui, and coastal provinces Jiangsu, Fujian and Guangdong, pose a growing threat to the fragile recovery. 

The central bank’s stimulus has been relatively modest this year. The People’s Bank of China is scheduled to review its one-year lending interest rate on Friday.

Amid heightened attention on the inflation outlook and under the pressure of capital outflows due to the Federal Reserve’s policy tightening, Governor Yi Gang has signaled that for the rest of the year, monetary stimulus would likely focus on boosting credit rather than lowering interest rates. 

“Chinese inflation dynamics remain very different to those in other major economies,” Craig Botham, chief China economist at Pantheon Macroeconomics, wrote in a note before the data release. “Monetary policy will not need to tighten even after several rising prints, because the long-term outlook remains benign.”

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