China’s consumer prices back in decline as recovery wobbles

China’s consumer prices in October showed a decline, indicating a weakening of domestic demand and deepening factory-gate deflation. This raises concerns about the possibility of a broad-based economic recovery. According to data from the National Bureau of Statistics (NBS), the consumer price index (CPI) dropped 0.2% compared to the previous year and slipped 0.1% from September. These figures were lower than the predicted 0.1% year-on-year fall and flat month-on-month reading. The last time both indicators were negative simultaneously was in November 2020 during the COVID-19 pandemic. The decline in consumer prices was primarily driven by a further slump in pork prices, which fell by 30.1% due to oversupply and weak demand. Even core inflation, which excludes food and fuel prices, slowed to 0.6% in October, indicating China’s ongoing battle with disinflationary forces and the risk of missing the government’s full-year headline inflation target of around 3%. Consumer prices slipped into deflation in July, returned to positive territory in August, and remained flat in September. Factory deflation has persisted for the 13th consecutive month in October. These indicators, along with other economic data, suggest that a meaningful recovery in China’s economy is still elusive. Chinese policymakers face the challenge of combating persistent disinflation amid weak demand. To prevent a downward drift in inflation expectations that could threaten business confidence and household spending, they need to implement an appropriate policy mix and more supportive measures. In October, the producer price index (PPI) fell 2.6% year-on-year, slightly lower than the 2.5% drop in September. Authorities in China have repeatedly downplayed the risks of deflation, emphasizing that there is no deflation currently or in the future. However, the recovery process is complicated by a property crisis, local debt risks, and policy divergence with the West. Recent indicators of the economy have been mixed, with unexpected growth in imports but contraction in exports. The official purchasing managers’ index showed factory activity contracting and services activity slowing. China also recorded its first-ever quarterly deficit in foreign direct investment (FDI), highlighting capital outflow pressure following Western governments’ de-risking moves. Moody’s expects China’s economy to grow by 5.0% in 2023, in line with the authorities’ target, but downside risks exist due to structural factors.