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China Slips Into Deflation as Consumer Prices Fall for the First Time in More Than Two Years

The Chinese economy has slipped into deflation, with consumer prices falling for the first time in more than two years in another sign of weakening demand.

The consumer price index (CPI) fell by 0.3% in July from a year ago, according to China’s National Bureau of Statistics on Wednesday. That’s the first time the index has fallen since February 2021.

The cost of food, transportation, and household goods all declined in July. In particular, pork prices were down 26%, and vegetable prices were down 1.5%.

The producer price index (PPI), which measures goods prices at the factory gate, also dropped by 4.4% in July from a year earlier. It was the 10th straight drop in PPI, and the first time since November 2020 that consumer and producer prices have fallen in the same month.

Signs of deflation have become more prevalent in the world’s second biggest economy in recent months, sparking concerns that China could enter a prolonged period of stagnation.

“Evidence of combined consumer and producer price deflation undoubtedly endorse the notion of a broad-based economic slowdown in China, ” said analysts from ING Group in a research note on Wednesday.

China’s gross domestic product barely grew in the April to June period compared with the previous quarter, as an initial burst in economic activity triggered by the lifting of pandemic restrictions late last year faded. China is also suffering from a prolonged slump in its real estate sector, and weak trade.

China refrained from the giant Covid-era support seen in developed economies. While this helped it avoid the rampant inflation shock seen elsewhere, disposable household income fell as wages and property asset values simultaneously stalled, UBS analysts said in a recent research note

The government has tweaked interest rates, promised more support for the private sector and incremental steps to boost the property market but those measures have done little to revive the economic recovery.

Analysts say Beijing must roll out more forceful plans to restore confidence and stimulate consumer spending.

“The economic momentum continues to weaken due to lacklustre domestic demand,” said Zhiwei Zhang, president and chief economist for Pinpoint Asset Management.

CPI deflation may put more pressure on the government to consider additional fiscal stimulus, he added.

Beijing’s scope for a big stimulus package is limited, however, by concerns about rising levels of national debt.

Source : CNN