China: Lower energy prices and weak demand kept up deflationary pressure in May – UOB Group

China’s Consumer Price Index (CPI) deflation continued into the fourth straight month in May. Headline CPI fell by -0.1% y/y (Bloomberg est: -0.2%; Apr: -0.1%) due to declining domestic food prices and weak energy prices. However, core CPI (excluding food & energy) stayed positive and edged up slightly to 0.6% y/y in May from 0.5% y/y in the two preceding months, UOB Group's economist Ho Woei Chen reports.

China is in deflation

"China’s Consumer Price Index (CPI) deflation continued into the fourth straight month in May due to declining domestic food prices and weak energy prices. The NBS estimated that 70% of the total sequential decline in the CPI of -0.2% m/m is attributed to the energy prices."

"The Producer Price Index (PPI) deflation widened more than expected to -3.3% y/y in May, the largest monthly drop in 22 months. The downward trend of international crude oil prices has affected the price decline of domestic oilrelated industries. However, factory prices for consumer goods fell at a more moderate pace."

"In Jan-May, headline and core CPI averaged -0.1% y/y and 0.4% y/y respectively while PPI averaged -2.6% y/y. We maintain our forecast for 2025 CPI at 0.0% while revising our forecast for PPI to -2.5% from -2.0%. For the monetary policy, we expect an additional 10-bps interest rate cut in 4Q25 with the 7-day reverse repo rate, 1Y LPR and 5Y LPR to end the year at 1.30%, 2.90% and 3.40% respectively. The prospect of another 50-bps cut to the RRR remains."