(July 9): China’s reflationary momentum showed signs of stalling in June, a reminder that the outlook for domestic prices is fragile as the economy emerges from deflation after an easing of tensions over Iran led to a pullback in commodity costs.
Consumer inflation and the core gauge of prices both slowed more than expected from a year earlier, according to data released by the National Bureau of Statistics (NBS) on Thursday. And while the effect of a low base from 2025 kept producer inflation on an upswing, factory prices declined 0.3% from May on a month-on-month basis, their first drop since July 2025.
“The fall in global crude oil prices led to a drop in prices for related sectors in China,” Dong Lijuan, a statistician with the NBS, said in a statement accompanying the release.
The yield on China’s 10-year government bonds was steady at 1.73% after the data publication. The onshore yuan was little changed even as most currencies in Asia weakened against the dollar on Thursday.
The waning strength of inflationary pressures predates the most recent flare-up between the US and Iran. China probably exited economy-wide deflation last quarter after a three-year stretch of declines in prices — a turnaround caused in large part by booming investment in artificial intelligence and the oil shock stemming from the conflict in the Persian Gulf.
See also: China consumer inflation slows, factory prices show sign of peak
As hostilities in the Middle East resumed this week, the uncertainty in the oil market sent Brent crude higher for three straight days.
“The latest escalation in US-Iran tensions could deliver some renewed upward pressure on inflation in the near-term,” said Julian Evans-Pritchard, head of China economics at Capital Economics. “But this will remain limited to a few narrow areas and inflation still looks set to return near zero once energy supply normalises.”
Despite the higher global cost of oil, chips and metals, however, a broader reflation remains in doubt as factories struggle to fully pass on higher costs to consumers because of sluggish consumer spending, putting their profitability under pressure.
See also: China auto sales drop even as exports help cushion slump
China’s producer inflation, which only turned positive three months ago, quickened slightly in June to 4.1% from a year ago, matching forecasts. The consumer price index (CPI) decelerated for the first time since March and reached 1%, falling short of the 1.1% median estimate in a Bloomberg survey of economists.
The core CPI, which strips out volatile food and energy prices, dipped to 1% in June, a sign domestic consumer demand is weakening even as trade booms.
The central bank also showed more concern about the increasing divergence in growth following a quarterly meeting of its monetary policy committee this month.
Within CPI, increases in the cost of vehicle fuel slowed in June to 15% from a year earlier, compared with 21% in May. Prices for tobacco and home appliances also moderated, while pork deflation persisted.
A drop in gold prices this year is removing another factor that’s been contributing to faster consumer inflation in China since late 2025. The category of “miscellaneous goods and services”, which includes gold jewellery, continued to show a slowdown in prices.
A few items grew more expensive and stood out against the backdrop of weaker inflation.
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Prices of communications equipment, which includes smartphones, climbed 7.6%, reflecting soaring chip costs. Egg prices jumped 16%, a result of a cyclical decline in the number of laying hens.
A growing number of analysts are estimating economic growth slipped below the lower bound of the official target of 4.5% to 5% in the second quarter.
The next window for policymakers to roll out more stimulus is the upcoming meeting of the Communist Party’s decision-making Politburo, which is set to be convened in late July. A slowdown in government spending has been a key drag on growth, something that authorities may seek to change.
“The inflation outlook allows policymakers to remain patient and keep interest rate cut on hold in 2026,” said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group, in a report. “As oil prices retreat, China’s PPI inflation is likely to ease toward 2%–3% in the coming months from its peak in June.”
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