China Faces Deflation Concerns as Consumer Prices Remain Low and Producer Price Fall Persists


Beijing, China - The persistently low consumer inflation and the ongoing decline in producer prices have raised concerns about deflation risks in China. These trends indicate a continued weakness in domestic demand and economic uncertainty, putting pressure on policymakers to implement stronger monetary support measures. The National Bureau of Statistics (NBS) reported that the consumer price index (CPI) rose by 0.2% in May compared to the same period last year, slightly higher than April's 0.1% growth but lower than the anticipated 0.3% rise.

Source: National Bureau of Statistics

Despite Beijing's target of approximately 3% CPI growth for 2023, the recent readings suggest a potential challenge in achieving this goal. In contrast, the producer price index (PPI), which reflects factory prices charged to wholesalers, fell by 4.6% year-on-year in May, extending the decline from April's 3.6% fall. The actual figure was below expectations, with experts projecting a 4.3% drop.

The persistently low CPI and expanded PPI decline fuel worries about deflation risks and point to underlying weaknesses in demand. Economists, including Zhang Zhiwei, President, and Chief Economist at Pinpoint Asset Management, emphasize the need for policymakers to take decisive action. Calls for stronger monetary support, such as policy rate cuts and financing assistance, are increasing in order to stabilize the economy.

While China experienced overall CPI growth of 2% in 2022, this year's target aims for stronger expansion. However, the recent inflation data indicates that the risk of deflation continues to loom over the economy. Zhang Zhiwei highlights that various economic indicators consistently signal a cooling economy, emphasizing the need for clear policy signals from the government.

Many experts, including Zhang, anticipate policy reviews in July when decisions will be made based on the release of second-quarter gross domestic product (GDP) data. These reviews, conducted by the Politburo led by President Xi Jinping, are expected to provide insights into the government's potential policy stimulus.

Source: National Bureau of Statistics

Analyzing the components of the CPI, food prices in China rose by 1% year-on-year in May, compared to 0.4% growth in April. Non-food prices remained stable, with no significant change from the previous month. Notably, pork prices fell by 3.2% compared to the same period last year, while fruit prices increased by 3.4% and vegetable prices declined by 1.7%.

China's core consumer inflation rate, which excludes volatile food and energy prices, rose by 0.6% in May compared to the previous year, slightly lower than April's 0.7% growth. Dong Lijuan, a senior statistician at the NBS, highlighted that consumer demand continued to recover in May, but the CPI declined on a monthly basis and showed a slight widening from the previous year. Lijuan also noted that international commodity prices fell in May, and both domestic and foreign industrial market demand remained weak, contributing to the decline in the PPI.

As China grapples with deflation concerns, policymakers are under increasing pressure to introduce effective measures to support the economy. The government's response to these challenges will play a crucial role in shaping the country's economic outlook in the coming months.

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