China's Reflation Trend Shows Signs of Slowing as CPI and PPI Inflation Undershoot Forecasts

World Economy News — 10/08/2026

China's consumer price inflation cooled more than expected in July, raising questions about whether the country's reflationary momentum is fading. Both headline CPI and producer price inflation came in below market forecasts, while persistent deflation in food and rent continues to weigh on the overall price picture. As the world's second-largest economy and a critical driver of global commodity demand, China's ability to sustain reflation carries implications for trading partners and global growth expectations.

CPI Inflation Falls to a Six-Month Low

China's CPI inflation dropped to 0.5% year-on-year in July, down from 1.0% in June, undershooting both market expectations (0.8%) and ING's forecast (0.9%). The reading marked a six-month low. On a month-on-month basis, CPI edged up slightly to -0.1% from -0.3%, representing the third consecutive month of negative territory.

Core CPI declined to 0.9% YoY in July, also reaching a six-month low. However, core inflation has remained consistently positive since March 2025 and has exhibited notably steadier behaviour than the headline measure.

The most significant mover in recent months has been the transportation fuels subcategory, which plummeted to just 0.8% YoY in July from 15.3% in June. Gasoline prices across China fell noticeably during July despite a spike in crude oil prices. Prices began to move higher again in the final week of July, a trend that could carry into August data. This category is expected to remain volatile, depending on geopolitical developments in the Middle East.

Food and Rent Remain Key Drags

Beyond energy price volatility, food and rent continue to be the primary downward pressures on inflation.

Food inflation recorded a fourth consecutive month of deflation in July, edging up 0.1 percentage points to -1.5% YoY. Pork prices (-13.3%) remain a major drag, with China's typical pork cycle largely delayed amid ample supply. China is the world's largest consumer and producer of pork, meaning prolonged weakness in this category reflects broader softness in domestic consumer demand. Most other food subcategories also remain in deflation, with the notable exception of eggs, where prices surged by 14.4%. Given that food represents nearly 30% of the CPI basket, continued deflation in this category constitutes a significant drag on headline CPI.

Rent remained unchanged at -0.6% YoY in July, marking a fourth straight month at that level. Rent has been in deflation territory for 27 of the past 28 months amid the continued decline of the property market, which has been under pressure since 2021 following regulatory crackdowns on developer leverage. Housing accounts for 22% of China's CPI basket.

Taken together, roughly half of the CPI is being held back by sticky deflation in food and rent, while energy price volatility is driving monthly changes. Research by ING colleagues on El Niño suggests a potential impact on the Asia Pacific region that could emerge later in the year, which may affect the food component. There are also recent signs of stabilisation in housing prices in China's largest cities, which could eventually help stabilise rents.

Despite the slowing headline inflation, ING hesitated to call an end to China's reflation story, noting that risks to the trajectory appear larger than they were a few months ago, particularly as domestic demand remains weak without significant policy support. Nevertheless, 2026 is still expected to end with inflation more convincingly above zero than in the past three years.

PPI Inflation Undershoots Forecasts

China's PPI inflation slowed to 3.5% YoY in July, down from 4.1% in June and short of both market (3.9%) and ING (3.8%) forecasts. On a month-on-month basis, PPI inflation dropped to -0.7%, the second straight month in negative territory following an eight-month streak of positive MoM growth. The deceleration in factory-gate prices bears watching for export-oriented economies, as Chinese producers have previously leveraged low domestic input costs to maintain competitive pricing in global markets.

The PPI breakdown remained highly imbalanced. Coal mining (27.1%), oil and gas extraction (3.2%), and non-ferrous metals mining (22.6%) led gains, while food manufacturing (-1.2%), wine, beverages, and tea manufacturing (-5.7%), and pharmaceutical manufacturing (-4.0%) remained in deflation.

With a less supportive base effect ahead, PPI has likely already peaked for the year, barring a worse-than-expected further oil price shock.

PBOC Rate Cut Remains on the Table

With energy inflation cooling in recent months and food price deflation proving stickier than anticipated, risks to ING's inflation forecast have shifted to the downside. The CPI inflation forecast for 2026 has been lowered to 0.9% YoY, down from 1.2%.

ING emphasised the importance of restoring positive inflation expectations in China after several years of near-deflation and debates about a potential Japanisation of the economy — a scenario in which entrenched deflation and weak demand become structural, as Japan experienced for decades. The combination of softening inflation momentum and weaker domestic economic activity beginning in the second quarter provides a solid case for a 10-basis-point rate cut by the People's Bank of China in the coming months to support growth.

Source: ING via Hellenic Shipping News