China: August CPI back in contraction - UOB Group

China's CPI fell more than expected, by -0.4% y/y in Aug but core CPI continued to edge higher to 0.9% y/y from 0.8% y/y in Jul, marking an 18-month high as government policies stayed geared towards promoting domestic consumption, UOB Group's Economist Ho Woei Chen notes.

China's economy has slowed since the start of 3Q25

"The CPI decline was due to a steeper drop in food prices as a higher base of comparison kicked in and the m/m increase of 0.5% was lower than the seasonal level. Meanwhile, the PPI deflation narrowed to -2.9% y/y in Aug, in line with expectation as it entered the 35th consecutive month of y/y contraction."

"We maintain our forecast for 2025 CPI at -0.2% (Jan-Aug: -0.1%), with a recovery to around 0.9% in 2026. For PPI, our forecast stands at -2.7% for 2025 (Jan-Aug: -2.9%) while we expect the contraction to narrow to -0.8% next year."

"China's economy has slowed since the start of 3Q25, prompting calls for the PBOC to cut interest rates as early as this month after the Fed resumes its easing at the Sep FOMC (16/17 Sep). However, the rally in China's stock markets may reduce the enthusiasm for near-term easing. Following the 10-bps rate cut in May and the latest loan interest subsidy policy in Aug, we only expect a 10-bps rate cut in 4Q25, with the 7-day reverse repo, 1-year LPR and 5-year LPR to end the year at 1.30%, 2.90% and 3.40%, respectively. We also see prospect of a further 50-bps cut to the RRR."