BEIJING—China's consumer inflation ticked up slightly in July but remained tame enough to give policy makers plenty of room to use more aggressive measures to boost a sluggish economy.
Meanwhile, factory prices continued their more than three-year decline, posing a deflation threat and adding to pressure for further more stimulus measures.
"China's monetary and fiscal policies have to become more supportive over the rest of the year," said Liu Li-Gang, an economist at ANZ.
China's consumer-price index rose 1.6% in July from a year earlier, picking up pace from the 1.4% year-over-year rise in June, data from the National Bureau of Statistics showed on Sunday. The producer-price index dropped 5.4% in July from a year earlier, accelerating its decline from a 4.8% year-over-year drop in June, and exceeding market forecasts. The PPI also declined 0.7% in July from June. In June, it fell 0.4% from the preceding month. The year-over-year fall in the producer-price index is the worst in nearly six years.
China's economic growth in the second quarter came in at 7% year-over-year—better than expected but still the slowest pace in six years. That reflects a combination of overcapacity in traditional industries, a weak property sector and sluggish exports.
The government has accelerated spending on infrastructure, focusing on roads, rail and subways, and offering tax breaks to businesses. The central bank has cut interest rates four times since November last year and allowed banks to lend more of their deposits to needy borrowers.
Consumer inflation in July, which increased 0.3% from June, was in line with expectations and well within the government's 3% annual target, giving Beijing room to pump additional credit into the economy when it sees fit.
The rise in consumer prices during the month was largely due to a steep upturn in pork prices, which jumped 16.7% from a year ago. The statistics bureau said that weak prices in the past discouraged farmers from raising more pigs.
On Friday, the nation's central bank tried to calm market concerns about pork prices potentially preventing it from taking more aggressive monetary easing if needed. It said that monetary policy wouldn’t be determined by the price of a single commodity.
Analysts said that the drop in the producer-price index also reflected lower global commodities prices, and the steady decline is unlikely to turn around soon.
"We expect the PPI to stay in negative territory through the first half of next year," said Liu Xuezhi, an economist at the Bank of Communications, adding that this was posing a challenge to the government's target of reaching 7% economic growth for the full year.
Other analysts said that the government would likely respond to the persistently weak data and roll out more infrastructure spending.
"The government is now pushing infrastructure spending," said Yang Zhao, economist at Nomura. "I think the government will be more proactive in its fiscal spending in the months ahead," he said.
—Rose Yu, William Kazer and Grace Zhu
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