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Economy

China's factory deflation slows in July as recovery gains strength

Consumer price index rose 2.7%, broadly in line with expectations

An employee works on a production line manufacturing steel structures at a factory in Huzhou, Zhejiang province, China, on May 17.   © China Daily/Reuters

BEIJING (Reuters) -- China's factory deflation eased in July, driven by a rise in global oil prices and as industrial activity climbed back toward pre-coronavirus levels, adding to signs of recovery in the world's second-largest economy.

The producer price index fell 2.4% from a year earlier in July, the National Bureau of Statistics (NBS) said in a statement on Monday, compared with a 2.5% decline tipped in a Reuters poll of analysts and a 3.0% drop in June.

Analysts said China's industrial output was steadily returning to levels seen before the pandemic paralyzed huge swathes of the economy, as pent-up demand, government stimulus and surprisingly resilient exports propel a recovery.

Iron ore futures prices in Dalian have rallied over 50% so far this year while prices of steel bars used in construction have jumped 12%.

Prices of petroleum and natural gas extraction led the headline gains, rising 12% month-on-month, thanks to the continued rebound in global crude oil prices, according to Dong Lijuan, a senior statistician at the NBS. Coal mining and automobile manufacturing prices also turned positive in July.

"A further ramp-up in fiscal stimulus should continue to shore up infrastructure spending in the coming months, supporting a further recovery in economic activity and producer prices," said Julian Evans-Pritchard, senior China economist at Capital Economics.

However, PPI rose 0.4% on a monthly basis, unchanged from the increase in June, pointing to strains on construction and production work caused by recent floods in southern China. Some economists have warned the recovery could stall amid cautious consumer spending and a resurgence in global infections.

Consumer inflation also picked up in July as bad weather pushed food prices higher.

The consumer price index rose 2.7% from a year earlier, its fastest pace in three months and compared with an expected 2.6% increase and a 2.5% rise in June.

It was mainly driven by surging pork prices, which rose 85.7% on a yearly basis.

However, core inflation, which excludes food and energy costs, rose a mere 0.5% in July from a year earlier.

"The higher-than-expected price increase will strengthen the determination of the monetary authorities to normalize policies," said Hu Yuexiao, chief macro analyst at Shanghai securities.

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