Price Precipice: China’s Steepest Deflation in 15 Years Spells Trouble.
China faces mounting economic hurdles as its consumer prices plummeted at the sharpest rate in over a decade, signalling deepening deflationary pressures and exacerbating the country’s economic woes.
In January, China’s Consumer Price Index (CPI) tumbled by 0.8% year-on-year, marking the steepest decline since the global recession of 2009, according to data released by the National Bureau of Statistics (NBS) on Thursday. This marks the fourth consecutive month of price declines, painting a grim picture for the economy.
However, analysts caution that the dramatic drop is largely influenced by seasonal factors, suggesting that the downturn may have already bottomed out. The NBS and some economists attribute the sharp decline to distortions caused by the timing of the Lunar New Year, which fell in February this year compared to January last year.
Amid a real estate slump, stock market turbulence, and weakening exports, Beijing is grappling with the urgent task of reigniting consumer and investor confidence. The recent removal of the chief stock market regulator underscores the severity of the challenges facing the Chinese economy.
Sluggish consumer demand in January further exacerbated the deflationary trend, particularly impacting food prices. The price of pork, a staple in the Chinese diet, plummeted by 17.3% year-on-year, while vegetable prices saw a nearly 12% decline.
Meanwhile, the Producer Price Index (PPI), reflecting factory-gate prices, registered a 2.5% year-on-year drop in January, a slight improvement from December’s 2.7% decline, according to NBS data.
Lynn Song, chief economist for Greater China at ING Economics, anticipates a reversal in consumer prices from February onwards, citing favourable base effects. Sequential data also paints a more optimistic picture, with CPI rising by 0.3% in January compared to December, marking the second consecutive monthly increase.
With the Lunar New Year festivities underway, robust holiday demand is expected to buoy prices. Millions of Chinese citizens are embarking on the annual Spring Festival Travel Rush, signalling a resurgence in travel following the pandemic. Preliminary data indicates a significant uptick in air and rail travel, suggesting heightened consumption during the holiday period.
Tourism-related prices surged by 1.8% in January from a year ago, indicating a revival in consumer services. HSBC economists anticipate sustained consumption to bolster the economy, with robust services consumption extending to durable goods throughout the year.
