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China Factory Prices Fail To Rise For First Time In 3 Years

chinainflation aug9 10jul19 lt

China's factory prices in June were unchanged from a year ago after an almost three-year long sequence of increases, raising concerns of a return of deflation in the industrial sector.

Meanwhile, consumer price inflation was steady despite a further rise in pork prices, and economists expect price growth pressures to remain subdued in future thus allowing the Peoples Bank of China to add more stimulus to support the economy.

Producer prices were flat year-on-year in June, which was the weakest outcome since August 2016, when they fell, data from the National Bureau of Statistics showed Wednesday.

Factory prices had risen 0.6 percent in May and economists were looking for a 0.2 percent increase for June.

Compared to the previous month, producer prices fell 0.3 percent in June after a 0.2 percent rise in May.

The consumer price inflation was 2.7 percent in June, same as in May, and the highest in 15 months. The outcome was in line with economists' expectations.

Food prices rose 8.3 percent, driven by a 42.7 percent jump in fresh fruit prices due to bad weather. Meat prices were up 14.4 percent, led by the price of pork that surged 21.1 percent due to tight supply caused by the outbreak of the African swine fever.

Non-food prices increased 1.4 percent. Transport and communication costs dropped 1.9 percent, mainly driven by a sharp drop in prices of vehicle fuels.

Core inflation, which excludes volatile food and energy prices, was 1.6 percent in June, same as in May.

On a month-on-month basis, the consumer price index decreased 0.1 percent in June after remaining unchanged in May. Pork prices rose 3.6 percent from the previous month.

Lower oil prices also helped to keep overall inflationary pressures subdued in June, economists said.

"Given subdued demand and an absence of price pressures at the factory gate, underlying consumer price inflation might seem likely to ease further in the second half of the year giving the PBoC scope for further stimulus if it sees fit," economists at Daiwa Capital Markets said.

The latest stabilization in consumer prices inflation is likely to be short-lived, Capital Economics said.

"The drag from falling oil prices should ease before long and the recent collapse in pig supply suggests that upward pressure on food prices is likely to intensify in the coming months," Capital Economics economists Julian Evans-Pritchard and Martin Rasmussen said.

"However, given that supply disruptions will be mostly to blame, we don't think that a further rise in headline inflation will prevent the People's Bank from loosening monetary policy."

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