After rising 0.2% year over year in May, China’s consumer price index was flat in June, surprising economists who had expected another 0.2% rise, according to China’s National Bureau of Statistics . The drop, which pushed Chinese inflation to its lowest level since February 2021, was driven mainly by falling pork and energy prices. But core inflation, which excludes more volatile food and energy prices, actually fell 0.1% from a year ago in June.
“The ultralow inflation reading lends support to our view that the PBoC is likely to implement two more rounds of policy rate cuts of 10bp [basis points] each, and another 25bp [basis points] cut to the RRR over the rest of the year,” the Nomura analysts wrote, referencing China’s key medium-term interest rate as well as banks’ reserve requirement ratio .
” as was seen during Japan’s “lost decade” in the 1990s as consumers and businesses shift from investing and spending toward debt minimization owing to persistent deflation. This effect could be even worse in China because the country lacks a social safety net, according to EY’s Daco. Without government backing, Chinese consumers are forced to save far more instead of spending and investing to boost economic growth.