China slides into deflation as consumer, producer prices decline

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China’s consumer and producer prices both declined in July from a year ago, a sign of deflation pressure as demand in the world’s second-largest economy weakens.

The consumer price index dropped 0.3 per cent last month from a year earlier, the National Bureau of Statistics said Wednesday, marking its first decline since February 2021. Economists surveyed by Bloomberg had predicted a 0.4 per cent decline in prices.

Producer prices fell for a 10th consecutive month, contracting 4.4 per cent in July from a year earlier, slightly worse than expected. It’s the first time since November 2020 that both consumer and producer prices registered contractions.

China witnesses falling prices

China is experiencing a rare period of falling prices as consumer and business demand weakens after an initial burst in the first quarter following the ending of pandemic restrictions. A prolonged property market slump, plunging demand for exports and subdued consumer spending are weighing on the economy’s recovery.

Using the gross domestic product deflator — a measure of economy-wide prices — China was in deflation in the first half of the year.

The International Monetary Fund defines deflation as “a sustained decline in an aggregate measure of prices,” such as the CPI or the GDP deflator.

While deflation boosts the case for the People’s Bank of China to add monetary stimulus, the central bank is facing several constraints that’s making it cautious, including a weaker yuan and elevated debt levels in the economy. Analysts expect the PBOC to take moderate steps to ease monetary policy for the rest of this year.

Unlike the temporary drop in consumer prices in late 2020 and early 2021 driven by falling pork prices, the contraction this time around is driven by more longer-term factors such as falling external demand and the property downturn. With export prices falling, China is set to pass on deflationary pressure to other countries via its massive goods trade.

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