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China's inflation rate falls to zero

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2023-07-10

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China's consumer inflation rate falls to zero in June, while factory-gate prices fell further, raising concerns about deflation in the economy.

The consumer price index, released by the National Bureau of Statistics on Monday, indicated weak demand and added to worries about the threat of deflation.

The figure came in below expectations, as economists in a Bloomberg survey had predicted a 0.2% increase. This latest data highlights the continued weakness in demand and the challenges faced by the Chinese economy.

Core inflation, which excludes volatile food and energy costs, also slowed, dropping to 0.4% from the previous month's 0.6%.

Additionally, producer prices experienced a sharper decline, falling by 5.4% in June compared to a 4.6% drop in May, further emphasising the challenges faced by producers. Economists had forecasted a 5% decline, indicating the severity of the price decreases.

The prolonged period of low inflation and falling factory-gate prices raises concerns about deflation and its potential impact on the economy. Deflation can discourage spending and investment, as consumers and businesses may postpone purchases and investments in anticipation of even lower prices, creating a self-reinforcing cycle of price declines.

While calls for action to support the economy have been growing, the measures implemented by Beijing thus far have been limited in scope. The central bank made a slight reduction in a key policy interest rate last month, and the government extended tax breaks for electric vehicle buyers.

Premier Li Qiang recently discussed potential aid with Chinese economists, emphasising that any policies would be targeted, comprehensive, and well-coordinated. This suggests that any further stimulus measures are unlikely to be substantial in size. One factor constraining larger stimulus measures is the high debt burden carried by local governments, which historically played a role in driving economic growth through increased spending.

The persistently low inflation and declining factory-gate prices indicate a cooling economic recovery in China.

The threat of deflation poses challenges to businesses and policymakers as they seek to stimulate demand and maintain economic stability. Continued monitoring and targeted policy interventions will be crucial in addressing the deflationary pressures and supporting sustained economic growth.

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