China’s economy continues to grapple with signs of deflationary pressure, as data released by the National Bureau of Statistics (NBS) on Sunday revealed that consumer prices rose less than anticipated in September, while factory-gate charges continued their two-year decline. The consumer price index (CPI), a key measure of inflation, inched up just 0.4% year-on-year, falling short of the 0.6% increase predicted by economists surveyed by Bloomberg. Meanwhile, producer prices—also known as factory-gate prices—plummeted by 2.8%, marking the 24th consecutive month of decline. These figures highlight the persistent deflationary challenges facing the Chinese economy, raising the urgency for additional policy support to stimulate growth and stabilize prices.
China’s economic recovery from the effects of the COVID-19 pandemic and subsequent lockdowns has been slower than anticipated, prompting concerns about weak domestic demand and insufficient inflationary momentum. Deflation, a sustained period of falling prices, can lead to decreased consumer spending and lower business investments, potentially hampering economic growth in the long run. The ongoing decline in factory-gate prices, combined with subdued consumer inflation, is a sign that China’s manufacturing and industrial sectors are struggling to regain their pre-pandemic dynamism.
For months, the Chinese government has been grappling with these deflationary pressures, attempting to strike a balance between stabilizing the economy and addressing underlying structural weaknesses. The latest data from September only adds to the concerns of policymakers who must weigh their next steps to revitalize the economy while ensuring long-term financial stability.
The Consumer Price Index (CPI), a key measure of inflation that tracks the price of goods and services for consumers, rose just 0.4% in September compared to the same month last year. While any increase is generally viewed as a positive sign of economic activity, the modest growth rate missed economists’ expectations of a 0.6% rise, according to a Bloomberg survey.
The slowdown in CPI growth has primarily been driven by sluggish consumer demand. China’s economy, once bolstered by a rapidly growing middle class and increasing consumer spending, has recently shown signs of fatigue. Weaker-than-expected price growth suggests that consumers are either unable or unwilling to spend more, potentially out of caution in an uncertain economic environment. The core CPI, which strips out the volatile components of food and fuel, grew by only 0.1% year-on-year, indicating that underlying inflationary pressures remain exceptionally weak.
Food prices, which hold a significant weight in China’s CPI, remained relatively stable in September, with no major fluctuations. This contrasts sharply with previous years when food prices, particularly pork, saw dramatic increases due to the African swine fever outbreak. While pork prices have now stabilized, the tepid growth in food costs indicates that inflationary pressure from this sector has largely dissipated, adding to the concerns that overall price growth remains sluggish.
Moreover, the government’s efforts to maintain food supply and avoid sharp increases in essential goods have played a role in keeping food inflation low. This approach helps protect consumers from price shocks but can also contribute to weaker overall inflation.
Apart from food, other key categories such as housing and healthcare, which are critical drivers of inflation in many economies, also saw minimal price growth in China. The housing market, which has been a cornerstone of Chinese economic growth for the last decade, is experiencing a slowdown. With reduced demand for property purchases and rental services, housing prices are not contributing to inflation as they once did.
Meanwhile, the healthcare sector, another major component of the CPI, has also seen restrained price increases. While healthcare costs typically rise due to demographic shifts and advances in medical technologies, China has managed to keep prices in check, potentially aided by government regulations and oversight. As a result, both of these key sectors are contributing less to the overall rise in consumer prices.
The Producer Price Index (PPI), which measures the price changes of goods at the factory gate, dropped 2.8% in September year-on-year, marking the 24th consecutive month of decline. Economists had predicted a 2.6% drop, underscoring the severity of the ongoing deflationary trend within China’s industrial sector.
The PPI reflects the costs of raw materials and production inputs, which are critical for determining the profitability of industries, particularly in manufacturing and heavy industry. A prolonged decline in producer prices can hurt corporate earnings, weaken industrial investments, and lead to reduced employment opportunities, further slowing the broader economy.
Several factors are contributing to the continued fall in producer prices. First, global commodity prices have been relatively weak, especially in sectors like oil, coal, and metals, which are critical inputs for many Chinese industries. China is heavily reliant on these materials for its manufacturing base, and any drop in global prices tends to translate into lower costs—and thus lower selling prices—within the country.
Second, overcapacity in key industries such as steel, cement, and coal has been a long-standing issue in China. This has led to intense competition and reduced pricing power for businesses, resulting in sustained deflationary pressure on factory-gate prices.
Third, the ongoing trade tensions with the United States and other trading partners have compounded the problem by dampening demand for Chinese exports. With fewer orders from overseas, Chinese manufacturers have faced difficulties maintaining price levels, contributing to the prolonged decline in the PPI.
Perhaps most concerning to economists and policymakers is the performance of core CPI, which excludes volatile food and energy prices. The 0.1% rise in core CPI reflects persistent weakness in the broader economy, beyond just the agricultural or energy sectors. Core inflation is often seen as a more accurate measure of underlying inflationary trends, as it filters out short-term price shocks caused by supply chain disruptions or external factors.
Low core CPI suggests that domestic demand remains weak across various consumer goods and services. Consumers are not spending as much as anticipated on non-essential items such as clothing, entertainment, and electronics. Without stronger consumer demand, it will be difficult for China to achieve a robust economic recovery, even if supply-side issues such as factory output stabilize.
The muted inflation data for September reinforces the argument for additional policy support from the Chinese government and central bank. The People’s Bank of China (PBOC) has already implemented several measures aimed at bolstering the economy, including lowering interest rates and reducing reserve requirements for banks to encourage lending. However, the latest CPI and PPI figures suggest that these efforts have not been sufficient to ignite strong demand or reverse the downward trend in producer prices.
- Monetary Easing: One potential course of action is further monetary easing, which could include additional interest rate cuts or more aggressive liquidity injections into the banking system. Lower borrowing costs might encourage businesses to invest and expand their operations, while also making it cheaper for consumers to take out loans for big-ticket purchases.
- Fiscal Stimulus: On the fiscal side, the Chinese government could increase public spending on infrastructure projects or offer targeted subsidies to key industries. This would help stimulate demand in sectors that are currently experiencing deflationary pressures, while also creating jobs and supporting wage growth.
Support for Small and Medium-Sized Enterprises (SMEs): SMEs, which form the backbone of the Chinese economy, have been hit particularly hard by the pandemic and its aftermath. Targeted measures, such as tax breaks or easier access to credit, could provide much-needed relief to these businesses, enabling them to increase hiring and production capacity.
Boosting Consumer Confidence: In addition to policy measures aimed at the supply side, the government could introduce initiatives to boost consumer confidence. This might involve offering consumption vouchers or other incentives to encourage people to spend more on goods and services. By stimulating domestic demand, the government could help lift inflation closer to its target range.
If left unchecked, deflationary pressures could pose significant risks to China’s long-term economic outlook. Falling prices might seem beneficial to consumers in the short term, but they can lead to a dangerous cycle of reduced spending and investment. When prices are expected to continue falling, consumers may delay purchases, expecting to get a better deal in the future. This decrease in demand can, in turn, lead businesses to cut production, reduce wages, or lay off workers, creating a negative feedback loop that drags down the entire economy.
Furthermore, deflation can increase the real burden of debt, as the value of money increases relative to prices. For heavily indebted sectors of the economy, including local governments and property developers, this could lead to heightened financial stress and potential defaults.
China’s inflation dynamics are also closely watched by the global economic community, as the country is a major driver of international trade and a key link in global supply chains. Prolonged deflation in China could signal weaker demand for imports of raw materials and consumer goods, potentially affecting trading partners from Asia to Europe and North America. Additionally, any further slowdown in Chinese manufacturing output could exacerbate supply chain disruptions that have already been felt worldwide.
Global commodity prices, particularly in the energy and metals sectors, may also come under further pressure if Chinese demand remains soft. This could have implications for commodity-exporting countries such as Australia, Brazil, and Russia, which rely heavily on Chinese purchases to support their own economic growth.
