China's headline producer price index fell 4.4 percent on the year in July after a decline of 5.4 percent in June. Headline PPI inflation has now been in negative territory for ten consecutive months. The index fell 0.2 percent on the month after dropping 0.8 percent previously.

Today's inflation data provide further evidence that China's economic recovery has lost momentum in recent months, with PMI surveys and offical activity data showing weaker conditions across the economy. Chinese leadership have been reported as noting"difficulties and challenges", including insufficient domestic demand, but the report also indicated that officials judged that there is presently no need for a major shift in policy settings. Today's data, however, may strengthen the case for some measures to support stronger demand.

Contraction in today's data was deeper than the consensus for the PPI to have fallen 4.0 percent on the year, but CPI contraction also published today was shallower than the consensus. The China ECDI and the ECDI-P rose from minus 9 to plus 14 and plus 20 respectively, indicating that recent Chinese data in sum are coming in above consensus forecasts.

Producer prices have been in contraction the last nine reports. July's consensus is minus 4.0 percent on the year versus minus 5.4 percent in June which compared with expectations for minus 5.0 percent.

The Producer Price Index (PPI) measures the change in the price of goods purchased and sold by producers. The industrial producer price index reflects the trend and level of prices change when the products are sold for the first time. The industrial purchaser price index reflects the trend and level of prices change for the products purchased by the industrial enterprises as intermediate inputs.

It is a leading indicator of consumer inflation - when producers pay and charge more for goods the higher costs are usually passed on to the consumer.

The PPI measures the industrial products price changes for the domestic market. Unlike most other countries, China only produces a comparison with the same month in the previous year but not with the previous month. The PPI covers all manufacturing activities. The prices include excise taxes but exclude VAT. The industry breakdown for the PPI follows China's Industrial Classification of the National Economy. The data include a 38 industry breakdown and are not adjusted for seasonality. They are available by the 20th of the month following the reference month and are published in the daily NBS paper"China Information".

The statistical survey of industrial producer prices covers prices for over 11,000 products from 1702 subclasses, 191 groups; and the statistical surveys of industrial purchaser prices cover prices for over 6,000 industrial products from over 900 subclasses. Industrial producer prices are collected from combined surveys of key businesses and typical businesses. Starting from 2011, the key businesses are those with their turnover from primary activities over 20 million yuan, and the typical businesses are those with less than 20 million yuan. The surveys cover about 60,000 industrial enterprises in over 400 cities across the country.