China's consumer prices rise faster than expected in July

Consumer prices in China rose more than expected, offering hopes of a recovery in domestic demand that has weighed on growth this year.

The consumer price index rose 0.5% from a year earlier, the National Bureau of Statistics reported Friday. That was the biggest increase since February, compared with a 0.2% rise in June and a median forecast of 0.3% in a Bloomberg survey of economists.

Factory prices continued a deflationary streak that began in late 2022, with the producer price index falling 0.8% from a year earlier. Economists surveyed by Bloomberg had expected a 0.9% drop after a 0.8% decline in June.

The world’s second-largest economy is battling its longest stretch of deflation since 1999 as weak consumption and investment demand lead to intense price wars across several sectors. Falling prices across the economy have led to slower nominal gross domestic product growth, undermined corporate profits and threatened to make consumers even more inclined to delay purchases because they expect costs to fall further.

The improvement in consumer price inflation was due to “a continued recovery in consumer demand and the impact of high temperatures and rain in some regions,” Dong Lijuan, chief statistician at the NBS, said in a statement.

Prices of vegetables and eggs rose in July, reversing losses from the previous month as a result of the weather. Gains in consumer prices were led by education and tourism services, which rose 1.7% from a year earlier. Clothing and footwear rose 1.5%.

In July, the core CPI, which excludes volatile food and energy prices, rose 0.4%, slowing from the previous month's 0.6% increase, indicating continued weakness in overall consumer demand.

The offshore yuan rose after the data was released, while Chinese bond futures fell. The benchmark 10-year yield rose one basis point to 2.19% in a week when state banks have been actively selling the bond to guide yields higher.

Chinese stocks advanced in early trading, with the CSI 300 index up 0.7% and the Hang Seng China Enterprises Index adding nearly 2%.

Reviving domestic demand is increasingly important as exports — a rare bright spot in the economy this year — unexpectedly slowed in July, signaling a cooling of global demand. That is putting Beijing’s target of growth of around 5% for this year at risk.

At a recent meeting, China's Politburo, the Communist Party's top decision-makers, pledged to put greater emphasis on boosting consumer spending. The government laid out a 20-step action plan to encourage more spending on services, though it offered few financial incentives to stimulate domestic demand.