China’s consumer price index (CPI) fell by 0.1% in the first two months of 2024 compared to the same period last year, according to data released by the National Bureau of Statistics on Sunday. The decline comes just days after the Chinese government lowered its annual inflation control target from around 3% to approximately 2% during the National People’s Congress.
February’s CPI dropped 0.7% year-on-year, reflecting ongoing deflationary pressures in the world’s second-largest economy. The latest figures extend a period of weak inflation that has persisted for two years, with the annual reading stagnating at 0.2%.
Falling Prices Across Key Sectors
Economists polled by Wind, a Chinese financial data provider, had forecast a 0.35% decline in CPI for February. However, the actual drop was steeper, driven primarily by lower food and service prices.
- Food prices saw a significant decline of 3.3% year-on-year in February.
- Service prices fell by 0.4% in the same period.
- Core inflation, which excludes volatile food and energy prices, decreased by 0.1% year-on-year in February but increased slightly by 0.3% over the January-February period.
Meanwhile, China’s producer price index (PPI), which tracks the cost of goods at the factory gate, contracted by 2.2% in February, following a 2.3% drop in January. This marks the 29th consecutive month of contraction in the PPI, reflecting weak industrial demand and sluggish economic activity.
Deflationary Pressures Persist
The ongoing decline in consumer and producer prices signals that China is still grappling with deflationary challenges. Zhiwei Zhang, chief economist at Pinpoint Asset Management, noted that while sentiment has improved in the technology sector, domestic demand remains weak, and the property market has not yet recovered at the national level.
“China’s economy still faces deflationary pressure. Fiscal policy needs to become more proactive, and monetary policy should be loosened further through interest rate and reserve requirement ratio (RRR) cuts,” Zhang said.
Impact on China’s Economic Strategy
The government has acknowledged these concerns in its latest work report, delivered by Premier Li Qiang at the National People’s Congress. The report pointed to sluggish consumer spending and emphasized efforts to stimulate household demand.
In response, Beijing has introduced several measures to support consumption:
- Increasing household incomes to boost spending.
- Strengthening market regulations to curb fraudulent advertising.
- Expanding the list of products eligible for trade-in programs to encourage consumer purchases.
Additionally, Premier Li addressed neijuan, a term describing cutthroat business competition driven by overcapacity and price wars, promising targeted actions to reduce its impact on the economy.
Challenges in the Global Market
China’s economic outlook is also influenced by external factors, particularly trade tensions with the United States. Exports remain vulnerable to geopolitical risks, and sluggish global demand could further impact the country’s economic recovery.
As China continues to navigate these challenges, economists anticipate that policymakers will introduce additional stimulus measures, including further interest rate cuts and financial incentives, to sustain growth and prevent prolonged deflation.
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