- Deflation in China continues to take hold.
- Consumer prices in China have fallen the sharpest in 14 years, new data shows.
- Turbulence in China’s real estate market is crushing consumer spending and confidence.
China’s economy continues to move in the wrong direction.
In the latest sign of worsening China’s deflation problem, new data showed that Chinese consumer prices fell in January at their steepest rate in 14 years.
The National Bureau of Statistics attributed the deflation figure to the impact of floating holidays, given that the Chinese New Year was in January 2023 rather than February this year, but this figure could have a ripple effect on the global economy. It suggests.
China’s CPI fell 0.8% in January from a year earlier, exceeding the 0.5% decline expected by economists in Bloomberg.
Consumer prices fell at an annual rate of 4.3% month-on-month, with food prices particularly sluggish. Year-on-year comparison in January:
- Pork prices fell by 17.3%
- Vegetable prices fell by 12.7%
- Fruit prices fell by 9.1%
The producer price index also fell by 2.5%, but service prices rose by 0.5% from the previous year, half the rate of increase in December.
“Disinflationary pressures from the ongoing real estate recession indicate a slowing of China’s reflation path,” Goldman Sachs strategists said in a note Thursday.
Deflation indicates weakness in consumer demand and confidence, which is a symptom of the ongoing real estate market crisis in the country. Chinese households have most of their wealth tied up in real estate, so the weak economy and uncertain outlook are prompting people to cut spending and save more.
The more consumer prices fall, the harder it will be for the Chinese government to reverse course. Foreign investors already fled the Chinese market in droves last year, and further deflation could pose a challenge to Chinese companies’ profits.
Economists at Bloomberg expect deflation to continue until at least the first half of 2024. Policymakers need more clarity on potential stimulus packages in March, when the national budget is released.
Researchers at the Institute of International Finance said in a recent report that China is at risk of a “debt deflation spiral.” In their view, falling prices are having a negative impact on corporate profits, stock prices, wage growth, and tax revenues.
The IIF warned that unless policymakers take action, deflationary expectations could become even more entrenched, further weakening domestic demand and discouraging foreign investment.