- Consumer inflation decelerated for fourth straight month
- Persistent deflationary pressures threaten to curtail spending
China’s consumer inflation weakened further toward zero, decelerating for a fourth straight month in a setback for government efforts to stamp out deflation and revive demand with economic stimulus.
The consumer price index rose 0.1% in December from a year earlier, in line with the median forecast of economists surveyed by Bloomberg. Factory deflation extended into a 27th month, though the producer price index recorded a slower drop of 2.3%, the National Bureau of Statistics said Thursday.
The persistence of deflationary pressures in China is in stark contrast to other major economies, with elevated inflation risks flagged by US Federal Reserve officials and euro-area price growth accelerating last month. The worry for Beijing is that an entrenched cycle of price decreases threatens to hold back household spending for longer and damages corporate revenues so much that it stifles investment and leads to further salary cuts and layoffs.
“Improvement in domestic demand is a necessary condition for reflation,” Citigroup Inc. economists Ji Xinyu and Yu Xiangrong said in a note. “But we would keep our policy expectations realistic,” they said, adding that officials will likely continue to take a reactive approach.
In a more encouraging sign for policymakers, core CPI — which excludes volatile food and fuel prices — picked up for a third month to 0.4% from a year ago, reaching the highest level since July.
For the full year, consumer prices only inched up 0.2% from 2023, well short of the 1.1% gain economists had predicted at the beginning of 2024.
Dong Lijuan, chief statistician at the NBS, said that while the consumer market remained largely stable in December, an annual drop of 0.5% in food prices was a drag on the overall index.
She also attributed monthly declines in PPI to price fluctuations in commodities and a seasonal slowdown in some industries.
The most recent inflation readings suggest the GDP deflator — a broader measure of economy-wide prices — will likely extend its drop for the seventh straight quarter, according to Bloomberg Economics. It will likely stay negative in 2025 for the third year in a row, which would be the longest streak since the early 1960s, Citi economists said in a note Monday.
Chinese stocks pared losses after the data release, with the CSI 300 Index trading little changed after a 0.5% decline earlier.
What Bloomberg Economics Says…
“China’s weak December price report shows the economy stuck in low gear despite stepped-up policy support since late September. With lack of specifics on further stimulus damping confidence again at the turn of the new year, policymakers need to quickly deliver support measures to fight off deflation risks.”
— Eric Zhu, economist. For full analysis, click here
Officials led by President Xi Jinping last month made boosting consumption and domestic demand the top priority this year for only the second time in at least a decade. They have pledged to use greater public borrowing and spending as well as monetary easing to spur growth in 2025.
China is expanding a program to subsidize consumer products and boost funding for industrial equipment upgrades. Officials on Wednesday said more products would be eligible for the subsidies, with companies in sectors such as electronic information and work safety included to get support this year.
But economists including Robin Xing of Morgan Stanley believe the Chinese government faces a prolonged battle to reflate the economy and shift sentiment.
“That is not going to dismiss deflationary concerns,” said Michelle Lam, Greater China economist at Societe Generale SA, referring to consumer prices. “We saw rather broad-based declines in items such as housing goods and services and health care.”
For the People’s Bank of China, the sluggish pace of price increases likely adds to arguments in favor of monetary easing. That might increase the tension between the central bank’s conflicting goals of supporting growth and slowing the yuan’s depreciation.
Officials have previously indicated they were ready to loosen policy further by cutting interest rates and reducing banks’ required reserve ratio to free up money to lend and invest.
“We don’t think the CPI release will be the main catalyst in terms of further PBOC easing, but it certainly adds another data point in the already favorable case for more rate and RRR cuts this year,” said Lynn Song, chief greater China economist at ING Bank in Hong Kong.
Written by: Bloomberg News @Bloomberg
The post “China Consumer Prices Weaken Further, Adding to Deflation Worries” first appeared on Bloomberg