Inflation to remain mild despite CPI rise in June

China's inflation is likely to remain mild this year and may not represent a major constraint on the country's monetary policy despite consumer inflation edging higher last month, economists said on Thursday.

The country's consumer price index, a main gauge of inflation, grew 2.5 percent year-on-year in June, with the increase mainly driven by rising food prices, according to the National Bureau of Statistics.

The rebound of new COVID-19 cases in Beijing and severe floods in some provinces have led to the rise of vegetable prices due to the temporary supply shortage, while the reduced imports of pork as a result of stricter epidemic control measures have also caused a slight increase in pork prices, the NBS said.

Meanwhile, the decline in the country's producer price index, a gauge of factory-gate prices, narrowed to 3 percent year-on-year in June from a 3.7 percent decline in the previous month. Looking at the month-on-month change, the PPI turned positive, up by 0.4 percent, contrasting with a 0.4 percent decline in the previous month.

The month-on-month rise in producer prices reflected a rebound in international commodity prices, a steady recovery in the domestic manufacturing sector and improved domestic demand, the NBS said.

Despite the recent price rise, China's inflation growth is likely to maintain the declining trend and the country is expected to meet the target of keeping the inflation rate below 3.5 percent this year, said Wen Bin, chief analyst at China Minsheng Bank.

"As social and economic activities are gradually recovering and government measures to keep supply and prices stable have been put in place, consumer prices will remain generally stable despite slight fluctuations," Wen said.

The country's core CPI, which excludes food and energy prices, rose only 0.9 percent year-on-year last month, 0.2 percentage point lower than the previous month, according to the NBS.

Mild inflation growth will provide greater room and flexibility for the country's prudent monetary policy, and policymakers will need to further step up financial support for the manufacturing sector and smaller businesses to ensure a steady economic recovery in the coming quarters, Wen said.

Ding Shuang, Standard Chartered's chief economist in China and North Asia, forecast that China's average consumer price inflation for the whole year will likely be lower than 3 percent, which should have no constraints on the country's monetary policy.

But some economists said that the rapid recovery of domestic demand will likely lead to higher prices and greater inflation pressure in the second half of the year. In addition, the recent stock market surge may complicate the country's monetary policy in the coming quarters as it could trigger policymakers' concerns over price bubbles in the financial markets.

Xu Gao, chief economist at BOC International, said that China's monetary policy in the second half of the year will not only focus on stabilizing the market and supporting business resumption. The Chinese central bank will also pay more attention to the possible side effects of the rapid growth of credit and the potential risks of asset bubbles.

Lu Ting, chief China economist at Nomura Securities, said in a research note that Chinese policymakers may be concerned that an unbridled stock market boom followed by a bust could sabotage the nation's efforts to return the economy to normal.

"This is why we believe some high-profile stimulus measures, such as reserve requirement ratio cuts, could be either delayed or replaced by other low-profile measures if Beijing becomes too concerned about a stock market bubble," Lu said.

Jiang Xueqing contributed to this story.