A breakdown of the figure shows that food prices climbed 2.4 percent, while non-food items, consumables and services went up 1.5 percent, 1.7 percent and 2 percent, respectively.

Consumer prices in the past seven months have increased 3.1 percent year on year,[Offshore Company Incorporation] lower than the inflation forecast for this year. In terms of month-on-month changes, the CPI in July edged up 0.1 percent. Food and consumables prices dipped 0.1 percent, while prices of non-food items were up 0.2 percent and service prices grew 0.6 percent.

This set of economic data indicates many things.

First, the Chinese and world economies are both being restructured amid a cyclical downturn. Stagnant prices at home and abroad are a sign businesses are reluctant to invest and consumers unwilling to spend. They also suggest a large amount of stimulus money hasn't flowed to the real economy as intended.

Second, the anemic market depends excessively on government rescue funds. China's anticipated stimulus measures such as monetary and fiscal policy adjustments - along with the US Federal Reserve's third round of quantitative easing (QE3) and the European Central Bank's injection of funds into the bond market - have been the only boosts for the market.

And if the expected policy changes do not come through, market sentiment will take a drubbing and result in sharper price slumps. Countries' bailout efforts in the past few years have averted an economic hard landing, but also proved futile in fostering growth. The moderate monetary policy hasn't worked in generating the consumer demand the real economy craves. In this sense, countries' monetary policies have all fallen into a "liquidity trap," whereby further easing will cause a terrible liquidity glut.

Price distortions[HongKong Richful  - Hong Kong Company Formation, Offshore Company Incorporation]

Third, in the absence of policy coordination among nations, the developed and developing world are both confronted with varying degrees of price distortions, which will hinder a world economic recovery.

In China, for instance, as the stimulus package winds down, the western and rural areas of the country are feeling the pinch more acutely than the eastern, better-off areas. And in the meantime, Chinese consumers' overall lack of buying power contrasts with the steady price growth of certain services.

This anomaly suggests that some restructuring efforts are merely adding to the operating costs of small businesses at industry's bottom rung, where profit margins are narrower amid a slowdown. Which means cost controls and adequate cash flows will determine the life or death of most companies today.

As such, any government policy must be geared toward reducing costs for businesses so they can survive the hard times. And it is a bad time to pursue higher profits as industrial upgrading promises. Western governments' tax cuts are illuminating as China formulates its new stimulus plan.

The United States, Europe and Japan, with their financial systems suffering from sloshing liquidity, have depreciated their currencies one after another. The rampant speculation on scarce resources, however, has dramatically increased their "reindustrializing" costs.

They respond by habitually resorting to trade protectionism. This isn't working. Economic difficulty requires countries to uphold, not compromise, free trade principles. What's really needed to fix the problem of price distortions is strengthened cooperation and coordination among nations, rather than mercantile and beggar-thy-neighbor policies.

Otherwise, the cost of global structural reforms and recovery would only get higher and threaten to stall growth.

All in all, China ought to orient its monetary policy toward cutting costs for businesses.

If reduced interest rates and reserve requirement ratios result in higher prices for land, raw materials and consumables, monetary easing is a flawed option, and cannot be justified by transient exuberance in the securities sector. Tax and industrial policies are perhaps more direct and significant in their effect than monetary overhaul.

But if lower interest rates and reserve ratio can curb foreign exchange hedging activity and resulting commodity price hikes, and if banks are able to fully perform their role of allocating resources so that cheap credit is available for robust businesses, the current monetary easing is justified and timely.

And a reduced reserve ratio is more relevant in light of a possible spike in global liquidity after a letup of the European debt crisis. If China's monetary policy by then isn't adequately eased, imported inflation will re-emerge. In that case, the Chinese economy could descend into dangerous stagflation.