BCMXY Bank of Communications Company Ltd (PK)

SHANGHAI—Consumer inflation in China decelerated in June as food prices increased at a slower pace, giving the central bank more leeway to ease monetary policy in the world's second-largest economy.

The National Bureau of Statistics reported Sunday that China's Consumer Price Index rose 1.9% in June from a year earlier, a little less than May's 2.0% increase. The key inflation reading slightly exceeded a median 1.8% gain forecast by 15 economists surveyed by The Wall Street Journal.

China's Producer Price Index declined 2.6% year-over-year in June, which was a little weaker than expected, compared with a 2.8% drop in May. The index has lingered in deflationary territory for more than four years, although it has decelerated less rapidly in recent months.

A monthly CPI reading well below Beijing's 2016 target ceiling of 3% gives policy makers more leeway to pursue easy-money policies amid a continued economic slowdown.

"Inflation is still soft. The problem is that demand remains quite weak," said Commerzbank AG economist Zhou Hao. "They'll definitely be easing policy ahead." Mr. Zhou said he expects both an interest-rate cut and a reduction in required bank reserves in coming months as China works to achieve its 2016 target growth rate of 6.5% to 7%.

China on Friday will report second-quarter growth. Economists expect it will match or come in below the first quarter's 6.7% rate, which was already the weakest pace since the global financial crisis.

According to the statistics bureau, vegetable, fruit and pork prices rose in June at a slower pace, helping to reverse recent upward momentum in consumer prices.

"The fear earlier this year about runaway inflation has largely gone," said Macquarie Securities Group in a research note.

But sharp earlier increases have left some consumers feeling pinched. Zhao Guilan, a 41-year old fruit and vegetable seller in Beijing, said the price of pork at around 23 yuan ($3.44) per 500 grams is nearly double its year-ago level, leading her to spend more carefully. "We rarely eat out these days," she said. "Going to a restaurant just costs extra money."

Economists also caution that torrential rains in southern China in recent weeks could boost vegetable prices at a faster pace in coming months. According to Bank of Communications Ltd., food accounts for about a third of China's CPI calculation.

Prices at the factory gate fell less rapidly in June as copper, aluminum and other global commodity prices rose or stabilized.

"The decline in the PPI can continue to narrow to nearly zero if commodities stay stable," said Gavekal Research in a report.

Less robust PPI deflation also could provide some relief to industrial companies that have seen their cash flow squeezed by rapidly falling prices, said ING Groep in a note, adding that this reduces the likelihood of a "Korea 1998-style banking crisis."

But ING added that it doesn't "lessen the urgency of sustaining infrastructure and housing investment-led growth" to offset the drag from high debt levels and bad loans. Some economists also caution that the possibility of Britain leaving the European Union could set off another round of global commodity price declines that end up fueling deflationary pressure in China.

"We're seeing no big improvement in the Chinese economy," said Mr. Zhou with Commerzbank. "If it's not getting worse right now, that's a good thing."

Liyan Qi contributed to this article.

Write to Mark Magnier at mark.magnier@wsj.com

(END) Dow Jones Newswires

July 10, 2016 21:05 ET (01:05 GMT)

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