Is China’s reflation trend running out of steam?
The desk positions that China's reviving inflationary momentum may be losing traction, as evidenced by the July CPI data revealing a year-on-year drop to 0.5%, the lowest in six months. Per the full note from ING, the declining inflation numbers, notably the consistent month-on-month price declines and core CPI slipping to 0.9%, signal potential persistent weaknesses in consumer demand and pricing power. This leads us to adopt a cautious outlook for the CNY in the near term, with particular attention to the implications for trade and capital flows amidst a tepid rebound in economic activity.
What the desk is arguing
The desk argues that China's reflation narrative is faltering due to mixed inflation signals, with CPI falling to a six-month low of 0.5% year-on-year in July. Despite some volatile categories like transportation fuels showing slight upticks, it remains clear from recent trends that food and rental costs are undermining broader inflationary pressures, a point emphasized by ING's analysis.
This assessment is underscored by the core CPI reading, which fell to 0.9%, reinforcing the argument that underlying price momentum is weak. August data will be pivotal; any further declines or stagnant readings may necessitate a recalibration of positions in the CNY.
Where it sits in our coverage
Our consensus for USD/CNY is set at 1.075, with a range between 1.04 and 1.12.
The desk's position aligns closely with jpmorgan, although it leans toward the stronger end of the range reflecting the cautious nature of the Chinese economy. Divergence noted with bofa forecasting a weaker CNY could emphasize a more pronounced bearish view on Chinese economic recovery.
How other firms see it
Analysts at jpmorgan and others view the current inflation data as a catalyst for potential policy adjustments, while bofa takes a contrary standpoint, suggesting these trends could lead to a more pronounced currency depreciation.
We should watch how these inflationary trends may influence USD/CNY movements, particularly ahead of any possible signals from the PBoC regarding monetary policy adjustments.
What the calendar says
With no upcoming major events on the schedule that could impact policy or sentiment, traders should remain vigilant for any unexpected economic releases or statements from Chinese officials that could further inform the outlook for inflationary trends and their potential impact on the yuan.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's July CPI fell to 0.5% YoY, marking a six-month low.
- 02Core CPI also contracted to 0.9%, suggesting weakening price pressures.
- 03Persistent declines in food prices, especially pork, continue to drag on inflation.
- 04The outlook for the CNY is cautious amid declining consumer prices.
Market implications
Watch for fluctuations in USD/CNY as potential inflation data from August are anticipated to drive volatility. A slip below 1.075 would suggest heightened trader sensitivity to further Chinese economic indicators.
Risks to this view
A reversal of this call could occur if inflation shows unexpected resilience, particularly a rebound in food price inflation or any stimulus measures from the PBoC aimed at reviving demand, thereby supporting the CNY.
Older quick take Quick take Published 03:05 China Is China’s reflation trend running out of steam? China’s CPI inflation cooled to a 6-month low in July, marking a third straight month of negative month-on-month prices, while PPI inflation also decelerated from June's peak. Though energy is volatile in the short run, the persistent drag from food and rental costs will decide if China's reflation trend lasts Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lynn Song Chief Economist, Greater China 0.5% YoY China's July CPI inflation Lower than expected CPI inflation cooled more than expected China’s CPI inflation fell to 0.5% year-on-year, down from 1.0% in June, coming in lower than expectations (market: 0.8%, ING: 0.9%) and reaching a 6-month low.
In month-on-month terms, CPI edged up slightly to -0.1% from -0.3%, marking the third straight month of negative territory. Core CPI fell to 0.9% YoY in July, also a 6-month low. However, it’s been consistently positive since March 2025 and shown notably steadier behaviour than the headline measure.
The biggest mover over the past few months has been the transportation fuels subcategory, which fell to just 0.8% YoY in July, down from 15.3% in June. Gasoline prices across China generally fell quite noticeably in July despite the spike in crude oil prices. We saw gasoline prices start to move higher again in the last week of July, which could be carried forward into the August data.
This category will likely remain choppy depending on geopolitical developments in the Middle East. Other than volatility in energy prices, we continue to see the main drags on inflation coming from food and rent. Food marked a fourth consecutive month of deflation in July, edging up 0.1pp to -1.5% YoY.
Pork (-13.3%) continues to be a major drag on prices. China's typical pork cycle has largely been delayed amid ample supply. Most other food subcategories are in deflation territory as well, with the key exception of eggs (14.4%), for which prices surged.
With food inflation representing nearly 30% of the CPI basket, this category remaining in deflation is clearly a notable drag on the headline CPI. The other category is rent. This component of CPI remained unchanged at -0.6% YoY in July for a fourth straight month.
Rent has been in deflation territory for 27 of the past 28 months amid the continued decline of the property market. Housing represents 22% of China's CPI basket. In sum, it appears that roughly half of the CPI is being held back by sticky deflation in food and rent, while volatility in energy prices is driving the monthly change.
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