China’s producer prices experienced their sharpest decline in over seven years in June, intensifying concerns about its economic growth. 

The move towards deflation in consumer prices for the first time since February 2021 further exacerbates worries. 

Weakening demand for industrial and consumer products has slowed China’s post-pandemic recovery, dampening the momentum observed in the first quarter and raising alarms about the health of the world’s second-largest economy.

Barclays economists argue that the challenging deflation environment and significant deceleration in growth momentum indicate that the People’s Bank of China (PBOC) has entered a rate-cutting cycle. 

The National Bureau of Statistics (NBS) revealed that the producer price index (PPI) fell for the ninth consecutive month in June, dropping 5.4% year-on-year. 

This represents the steepest decline since December 2015, surpassing the 4.6% decrease from the previous month and the anticipated 5.0% fall.

On the other hand, the consumer price index (CPI) remained unchanged year-on-year, in contrast to the 0.2% increase seen in May, mainly due to a more rapid decline in pork prices. 

This defied expectations of a 0.2% rise and marked the slowest pace since February 2021. 

Nomura predicts that consumer prices could fall by 0.5% year-on-year in July, accounting for the potential rise in service inflation during the summer holiday season.

The unexpected downturn in inflation figures triggered a decline in the yuan and caused Asian stocks to slip. 

Economists at Capital Economics anticipate headline inflation to reach approximately 1% by the end of the year, which, although a slight improvement, will not impede the PBOC’s ability to loosen policy further. They believe fiscal policy will serve as the primary means of support, with only a 10 basis points reduction in policy rates expected this year, given weak credit demand and currency pressure.

The energy, metals, and chemicals sectors experienced the most significant yearly decline in producer prices as domestic and foreign demand weakened. 

However, experts suggest that the decline in the producer price index may have bottomed out and expect a gradual narrowing in the year’s second half.

To combat these economic challenges, China’s central bank will likely implement further lending rate reductions.

Analysts also anticipate cuts in the reserve requirements ratio and interest rates in the latter half of the year.