By Qiaoyi Li and Ryan Woo

BEIJING (Reuters)

China’s consumer inflation accelerated in August to the fastest pace in half a year, primarily driven by higher food costs due to weather disruptions rather than a recovery in domestic demand, as producer price deflation worsens.

A sluggish start in the second half raises pressure on the world’s second-largest economy to implement more policies amid a prolonged housing downturn, persistent joblessness, debt challenges, and rising trade tensions.

The consumer price index (CPI) rose 0.6% year-on-year last month, up from a 0.5% increase in July, according to data from the National Bureau of Statistics (NBS). However, this was below the 0.7% increase predicted in a Reuters poll of economists.

Extreme weather conditions this summer, characterized by severe floods and intense heat, have driven up farm produce prices, contributing to the acceleration of inflation.

In August, China reported that 1.46 million hectares of crops were impacted by various natural disasters. NBS statistician Dong Lijuan stated, “The higher CPI in August was due to high temperatures and the rainy weather.”

Food prices surged by 2.8% year-on-year in August, up from a flat result in July, while non-food inflation eased to 0.2%, down from 0.7% in July.

Junyu Tan, North Asia Economist at Coface, noted, “But the rebound was softer than expected and did little to alleviate deflation concerns. Much of the improvement has been food reflation, which is vulnerable to fluctuating weather conditions and capacity changes.”

Core inflation, which excludes volatile food and fuel prices, remained at 0.3% in August—the lowest in nearly three and a half years—down from 0.4% in July. The month-on-month consumer inflation gauge increased by 0.4%, slightly below economists’ expectations of a 0.5% gain.

As a result of these economic pressures and the latest inflation data, China’s yuan fell against the dollar on Monday, with long-dated yields reaching record lows. Chinese stocks also ended the morning session lower.

In strong remarks at the Bund Summit in Shanghai last week, former central bank governor Yi Gang emphasized the need for measures to combat deflationary pressure.

A national initiative intended to allocate $41 billion in ultra-long treasury bonds for supporting equipment upgrades and consumer goods trade-in has failed to significantly boost consumer confidence, as domestic car sales witnessed a fourth consecutive month of decline in July. Tan remarked, “These policies will take time to filter through, so a demand-led reflation is obviously not yet on the horizon.”

In August, the producer price index (PPI) fell by 1.8% year-on-year, marking the most significant decline in four months. This decline was worse than the 0.8% drop in July and below the anticipated 1.4% fall.

Tan from Coface stated, “The ongoing deflationary pressures stem from a broader issue of production surplus, which continues to outstrip demand.”

Gabriel Ng, an assistant economist at Capital Economics, expressed optimism about increased fiscal spending potentially boosting domestic demand in the coming months. However, he cautioned that current government policies remain too focused on investment, potentially exacerbating overcapacity issues.

Overall, faltering economic activity has led global brokerages to reduce their China 2024 growth forecasts to below the official target of approximately 5%.

A central bank official indicated that there is still room for China to lower the reserve requirement ratio for banks.