Subdued inflation points to policy easing

Moderate price data released Sunday may prompt policy makers to use mild policy stimulus to achieve growth target, economists predicted.

China's consumer price index (CPI), a main gauge of inflation, grew 1.9 percent year on year in June, according to the National Bureau of Statistics (NBS).

June's data slowed from 2 percent growth in May and dropped for the second-consecutive month, from 2.3 percent in April when the CPI reached the highest level since July 2014.

CPI grew 2.1 percent in the first half of 2016, while the annual target was set around 3 percent.

NBS statistician Yu Qiumei attributed the subdued inflation mostly to eased food prices.

The price of food, cigarettes and liquor increased 3.7 percent year on year in June, slowing from 4.7 percent in May, according to the NBS data.

China's producer price index (PPI), which measures costs for goods at the factory gate, slid 2.6 percent year on year in June, compared with a 2.8-percent decrease in May.

Over the last six months, industrial product prices rebounded slightly but consecutively on an annual basis.

Nevertheless, the June reading was the 52nd-straight month of decline as China's economic slowdown and industrial overcapacity weighed on prices.

PPI dropped 3.9 percent year on year in the first half of 2016.

CPI was marginally above expectations of 1.8 percent, while PPI was a fraction below expectations of minus 2.5 percent, said Tom Orlik, Bloomberg's Chief Asia Economist.

Orlik believes that industrial product prices, which continued to edge out of deflation, and PPI improvement meant stronger corporate profits and more funds to repay loans, pay wages and fund spending.

HSBC chief China economist Qu Hongbin, however, was less optimistic, warning that deflation risks were still there.

Although commodity prices continued to improve, industrial product prices are unlikely to recover substantially as domestic demand remained weak, said Qu, who added that measures were needed to restore business confidence.

"The easing bias will be maintained but a major addition to stimulus is unlikely," said Orlik.

An interest rate cut is not out of the question but is unlikely given stability in headline growth rates, according to the Bloomberg economist.

China's GDP grew 6.7 percent in the first quarter of 2016, and the annual target was set between 6.5 and 7 percent. Second quarter GDP, which will be released Friday, will be an opportunity for policy makers to recalibrate their stance.

"Less high-impact policy moves, including a cut in the reserve requirement ratio or use of targeted tools to guide market rates down are more likely," said Orlik.

There are many uncertainties both externally and internally.

Brexit threatens to deal a blow to global demand, but it is too early to gauge the impact,he said, noting the U.S. labor markets wobbled enough to throw an interest rake hike off the Fed's agenda but have now regained stability.

The recent disastrous floods in south China could also push up grain, meat and vegetable prices, analysts warned.

The National Development and Reform Commission on Sunday asked local price regulators to keep farm produce prices stable during the flood season.