Consumer prices (CPI) in China fell 0.3% in September, compared to the same period last year, registering the second consecutive month of decline, although smaller than the 0.4% drop felt in August, it was announced today.
On the other hand, the drop in the consumer price index, the main inflation indicator released by the Chinese National Bureau of Statistics (NBS), was worse than market expectations, as analysts expect a drop of just 0.1%.
In six of the nine months this year, the CPI in China was negative, having recovered only in January (plus 0.5%) and June (plus 0.1%). The sharpest drop occurred in February (minus 0.7%).
The world’s second largest economy has been facing deflationary pressures for more than two years, with weak domestic demand and excess industrial capacity penalizing prices, while uncertainty in international trade makes it difficult for suppliers to sell products.
Deflation consists of a fall in prices over time, as opposed to an increase (inflation). The phenomenon reflects weakness in domestic consumption and investment and is particularly dangerous, as a drop in the price of assets, usually contracted using credit, generates an imbalance between the value of loans and bank guarantees.
Another effect is to lead to the postponement of consumption and investment decisions as a result of expectations of lower prices in the future, which can create a downward spiral in prices and demand that is difficult to reverse, affecting the entire economy.
The fall in prices began in 2022, with the devaluation of the most important asset in China: residential real estate. The fall in property prices led to a drop in household confidence, resulting in a contraction in consumption. This, combined with the country’s excess production capacity, fueled a price war between manufacturers and retailers, triggering a deflationary spiral.
Beijing has, however, taken steps to end the price war. The Chinese Communist Party also promised, in July, to combat “irrational competition” in several sectors.
Dong Lijuan, a statistician at NBS, preferred to highlight that underlying inflation – an indicator that excludes food and energy prices, as they are more volatile – marked the fifth consecutive month of increase in September, rising 1% compared to the previous year, the first time in 19 months that it reached this level.
The producer price index, which measures the evolution of ex-factory prices, fell 2.3% in August, marking the 36th consecutive month of contraction.
The value was in line with analysts’ forecasts, but represented an improvement compared to the 2.9% drop recorded in August.
According to Dong, the slowdown in the decline is due not only to a lower comparative base, but also to the impact of macroeconomic policies promoted by Beijing, both in terms of creating a “unified national market” and in terms of “industrial restructuring and increasing consumption potential”.