China Grapples with Deeper Deflation as Prices Plummet at Fastest Rate in 15 Years

Massive Deflation in China as CPI Plummets by 0.8%
Chinese economy

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Massive Deflation in China as CPI Plummets by 0.8%

China faces mounting challenges as its consumer prices spiral deeper into deflationary territory, experiencing the most substantial decline since the global recession of 2009, highlighting the formidable obstacles confronting the economy.

According to data released by the National Bureau of Statistics (NBS) on Thursday, China’s Consumer Price Index (CPI) plummeted by 0.8% in January compared to the previous year, marking the sharpest decline since September 2009 and extending a streak of four consecutive months of downturn.

While the substantial drop may appear alarming, analysts attribute much of it to seasonal factors and suggest that the downturn may have already reached its nadir. The NBS and some economists point to the impact of holiday demand in January 2023, which saw a 2.1% increase in CPI, as contributing to the perception of particularly weak prices this year.

According to HSBC economists, the Lunar New Year’s shift from January to February this year distorted the comparison, influencing the base effect and exacerbating the apparent decline.

Beijing is confronted with the urgent task of restoring consumer and investor confidence amid multiple challenges, including a real estate downturn, stock market turbulence, and weakened exports. The recent removal of its primary stock market regulator underscores the gravity of the situation, with trillions of dollars wiped off shares in recent years.

Weak consumer demand further compounded the decline in prices last month, particularly in the food sector. Pork prices, a staple in the Chinese diet, plunged by 17.3% from the previous year, representing the most significant drop among all consumption items, while vegetable prices slid nearly 12%.

Despite the gloomy outlook, economists like Lynn Song from ING Economics suggest that consumer prices are poised to rebound from February onwards, buoyed by strong holiday demand associated with the Lunar New Year festivities. The migration phenomenon, known as the “Spring Festival Travel Rush,” is expected to drive consumption demand during the holiday period, with preliminary data indicating a surge in travel compared to pre-pandemic levels.

Moreover, consumer services prices have also seen an uptick, with tourism-related prices rising by 1.8% in January from a year ago, indicating a potential resurgence in consumption demand.

Looking ahead, HSBC economists anticipate consumption to remain a key pillar supporting the economy this year, with robust services consumption extending to more durable goods consumption, signalling optimism for China’s economic trajectory amidst the challenges posed by deflationary pressures.