China inflation sharply dips to 2.2%

PPI dropped as well to -2.1% y-o-y from -1.4% in May.

According to Nomura, China's CPI inflation dropped to 2.2% y-o-y in June from 3.0% in May. The sharp decline in CPI inflation was partly driven by lower prices of food items, which has the largest weighting in the CPI basket. Food price inflation fell to 3.8% y-o-y from 6.4% in May, while non-food inflation remained unchanged at 1.4% in June.

"On a month-on-month basis, food prices fell by 1.6% and non-food prices were flat. Of the eight categories in the consumer goods basket, prices for transportation and communications dropped faster than other non-food components and its historical average," Nomura said.

"Producer price index (PPI) output prices continued to drop in June to -2.1% y-o-y from a -1.4% in May. The decline in input prices for industrial producers accelerated to -2.5% in June from -1.6% in May. Lower PPI was driven by both weak domestic demand and lower commodity prices. The gap between output and input prices continued to widen, which helps profit margins for manufacturers," Nomura added.

"Policy easing has indeed picked up as indicated by two interest rate cuts within the past month. Lower inflation creates space for further policy easing ahead. CPI inflation is expected to drop sharply again in July to below 2%. Full year 2012 CPI is foreseen at 2.9%, well below the government‟s annual target of 4%."

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