Chinese consumer price inflation fell from an annual 3.1% to 2.9% between May and June but growth in the wider GDP deflator measure rose to 5.6% in the second quarter from 4.6% in the first – see chart. This is above the average of 4.4% since 2000.

Annual GDP deflator inflation has averaged 2.5 percentage points more than CPI inflation since 2000 but, unusually, the gap closed temporarily during the "great recession", which, apparently, bypassed China. This could reflect price weakness in non-consumption GDP components; it is also consistent with a massaging down of the deflator data in order to boost published real GDP growth rates.

Deflator inflation peaks of 8.8% in 2004 and 11.0% in 2007 followed highs of 20% and 23% respectively in annual growth in narrow money, M1 – see chart. With M1 expansion having reached 39% last year, it would be surprising if second-quarter inflation of 5.6% marks the peak in the current upswing.

Chinese monetary policy is on hold but inflationary risks from the monetary overhang suggest no scope for growth-boosting actions.