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Due mostly to rising pork prices, China's consumer inflation increased in July to its highest level in two years, while sluggish consumer demand restrained overall price pressures. According to National Bureau of Statistics statistics released on Wednesday, the consumer price index increased 2.7% from a year ago during the last month while pig prices increased by 20.2%. Compared to the 2.5% climb in June, the CPI increase was less than the 2.9% consensus prediction in a Bloomberg survey of experts.

In contrast, as commodity prices declined, producer price inflation slowed to 4.2% in July from 6.1% in June. Consumer inflation in China has been relatively low this year compared to other major economies because severe Covid control measures and isolated outbreaks have limited consumer and business expenditure. In addition to these virus outbreaks, China's economic recovery has remained precarious, with manufacturing activity unexpectedly falling last month and continued declines in real estate sales.

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However, this year's CPI is predicted to increase due to rising hog prices and a stronger economic outlook, which might put the government's ability to provide additional stimulus to the test. However, the core CPI, which excludes the erratic prices of food and energy, is still weak in July at 0.8%, showing that there is not enough demand pressure in the economy to cause policymakers to be alarmed.

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“Inflation will likely rise past 3% in the next two months, due to a low base and the lift from pork prices," said Bruce Pang, head of research and chief economist at Jones Lang LaSalle Inc. “But core inflation will likely stay benign as domestic demand remains weak. This won’t cause much restriction to the monetary policy."

Early trading on Wednesday saw a 0.3% decrease in China's leading CSI 300 Index, mirroring declines in larger Asian equity markets. Bond futures increased 0.2% as the yield on the 10-year government bond decreased by 1 basis point to 2.73%.

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According to the NBS in an accompanying statement, quoting senior statistician Dong Lijuan, the price increases of pork, fresh vegetables, and other items, as well as seasonal variables, were mostly responsible for the increase in inflation in July. With pig prices, a crucial component of China's CPI basket, marking the first year-over-year gain since September 2020, overall food prices rose 6.3% in July from a year earlier.

From a year earlier, sales of fresh fruits and vegetables increased by 16.9% and 12.9%, respectively. Prior to the release of the CPI, analysts at China International Capital Corp warned that consumer inflation would exceed the government's earlier announced objective of approximately 3%. However, the analysts predicted that for the sake of a stronger economy, policymakers would likely put up with greater inflation. The Chinese government has previously expressed its willingness to allow the CPI to gradually rise.

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“If we can keep the unemployment rate below 5.5% and the CPI rise stays under 3.5% for the whole year, we can live with a growth rate that is slightly higher or lower than the target, not too low of course," Premier Li Keqiang said at an event with business leaders hosted by the World Economic Forum last month.

(With agency inputs)

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