CNY: CPI improved, but only at first glance – Commerzbank

Consumer prices in China rose 0.5% in July from a year earlier, much more than most analysts in a Bloomberg survey expected. However, the increase was mainly driven by food prices, which stopped declining in July as they had in the previous month, Commerzbank’s FX strategist Volkmar Baur notes.

Low price inflation is not limited to housing

“Core inflation, on the other hand, fell to just 0.4% year-on-year, the same level as in January - the lowest level ever recorded outside the pandemic. China's ongoing property crisis is clearly having an impact on inflation.”

“Although China does not publish official weights for its CPI basket, housing costs are estimated to account for around 20% of the CPI. And here, the negative price trend is becoming more pronounced - also a novelty outside of pandemic times. In July, housing costs fell by 0.3% year-on-year, which is also reflected in the core rate due to its assumed high weight in the index.”

“However, low price inflation is not limited to housing. In addition, none of the 7 major categories has a year-on-year inflation rate above 2%. None of this means that China is in deflation. Price trends are positive and core inflation remains above zero. However, chances are that China is just one external shock away from falling into deflation. This is a risk that is being seen and priced into the currency (and bond) markets – and weighing on the CNY.”