China’s consumer prices fell for the first time since early 2021 amid the risk of a “low inflation trap” that could weigh on already lackluster demand and an underpowered economic recovery. The consumer price index (CPI) fell by 0.3% in July from a year earlier, following a flat reading in June, the National Bureau of Statistics (NBS) said. China last reported a drop of its CPI by 0.2% in February 2021. The low reading highlighted incessant concerns about deflation as persistent sluggish domestic demand has dragged down China’s economic recovery, with private companies reluctant to invest and expand. Meanwhile, the producer price index (PPI), which reflects the prices that factories charge wholesalers for products, fell by 4.4% in July, year-on-year, narrowing from the fall of 5.4% in June. “Both CPI and PPI are in deflation territory. The economic momentum continues to weaken due to lackluster domestic demand,” said Zhang Zhiwei, President and Chief Economist at Pinpoint Asset Management. “It is not clear at this stage if the policies announced recently can turn around the economic momentum soon. The CPI deflation may put more pressure on the government to consider additional fiscal stimulus to mitigate the challenges.”
The NBS said that the CPI drop will only be temporary, and it is expected to pick up gradually as the economy recovers and market demand continues to expand steadily, while the impact of the high base from the same period last year will also fade. Within the CPI, food prices fell by 1% from a year earlier in July, compared to a rise of 2.3% growth in June, while non-food prices rose by 0.5% last month, year-on-year, up from a fall of 0.6% growth in June. China’s core consumer inflation, excluding the volatile prices of food and energy, rose by 0.8% in July compared with a year earlier, up from 0.4% growth in June. Analysts have argued that reforms and more policy support are necessary to turn the economic situation around, including an increase in public spending, interest rate and tax cuts, as well as a more well-rounded social security net to promote consumption.
Authorities have conceded previously that the CPI was likely to drop in July, as a result from last year’s high base, when inflation pressures were at a two-year high. A rebound is expected to start in August, bringing CPI up to close to 1% at the end of the year, although it is still far from the “around 3%” official CPI target set for 2023, the South China Morning Post reports.
