China’s Latest Inflation Data: Recovery Still on Shaky Ground

On June 9, China’s National Bureau of Statistics released its latest consumer price figures. The Consumer Price Index (CPI) fell 0.1% year over year in May, marking four straight months of deflation. This reflects tepid domestic demand and suggests that a solid economic recovery is not yet in place.

Producer prices also told a weaker story. The Producer Price Index (PPI) dropped by 3.3% from a year earlier — a deeper decline than April’s 2.7% — indicating persistent pressure on manufacturers struggling with high inventory and sluggish factory output.

Volatile Food Prices and Weak Inflation Signals

Looking at CPI components, prices fell 0.2% month over month in May. Food prices mirrored the decline, led by an 8.3% plunge in fresh vegetable prices. That alone dragged heavily on the overall index. On the flipside, fresh fruit prices rose 5.5%, while pork and aquatic products also ticked higher.

Non-food prices held relatively steady, and core inflation — which excludes food and energy — rose 0.6% year over year, a slight pickup from April’s 0.5%. Still, the data shows limited pricing power and continued softness in consumer demand.

Pressure Mounts on Factories as PPI Falls Further

Upstream, May’s PPI declined by 0.4% month over month, underlining weak industrial demand alongside deflationary pressures. Slowing global demand and renewed U.S.-China trade friction are compounding problems for export-facing sectors.

Manufacturers are still clearing excess inventory, but at a sluggish pace. Businesses remain cautious, and profit margins are being squeezed.

Policy Support Likely to Increase as Deflation Persists

Facing months of deflation, Beijing has signaled a stronger approach to macro policy support — including expanding fiscal tools and encouraging credit growth — all aimed at stabilizing domestic demand and boosting business confidence.

While some sectors are showing early signs of demand recovery, overall momentum remains fragile. If deflation persists, markets expect additional policy steps in the coming months.

Markets Watching Beijing’s Next Move, as U.S. Talks Loom

Global investors are closely eyeing China’s economic and policy trajectory. With another round of U.S.-China trade talks on the horizon, manufacturers are hoping for relief, which could shape the production outlook in the months ahead.

Interestingly, despite the weak inflation print, the Australian dollar barely moved — a sign that markets remain watchful, but unconvinced of any clear direction for China’s economy just yet.

Looking Ahead: Unlocking Consumption and Industrial Upgrades

The next few months will be pivotal for China’s economy. To exit this deflationary patch, the country needs to unlock consumer spending potential and accelerate industrial upgrading.

If core inflation continues to inch up and consumer-boosting policies gain traction, we may finally see demand stabilize — and with it, broader price levels and business confidence.

Investors will be closely watching the upcoming consumption season and how well these policies are put into place to assess whether a durable recovery is truly underway.