China’s deflation crisis is far from over despite a slight rise in prices last month.
The Consumer Price Index (CPI) in China tipped up slightly in August with its highest increase since January 2024. The Chinese economy has suffered from deflation and depressing internal demand since the official end of the pandemic in the country in late 2022.
CPI increased by 0.6% in August, though still less than the 0.7% expected by Reuters-polled economists. That, however, is still more than the 0.5% increase in July.
Food prices were the highest driver of consumer prices in August. Pork, a staple food in China, saw its annual price increase by 16.1%. China is the world’s largest producer of pork with over half of the global production.
Vegetables saw the steepest annual increase at 21.8%. Overall food prices increased 2.8% year-on-year. The rise was caused by difficult weather in the summer, which hampered farming practices in China’s inland. “The higher CPI in August was due to high temperatures and the rainy weather,” NBS statistician Dong Lijuan said in a statement.
Core inflation, a measure that strips out volatile food and energy prices, rose barely at 0.3% for the month. Economists don’t expect this uptrend to continue unless the People’s Bank of China (PBOC) takes urgent measures.
Economic reforms
Analysts and economists have urged Chinese officials to implement nationwide reforms to reinvigorate demand, reduce local government debt, and solve the crippling real estate crisis.
“The fiscal policy stance needs to become more proactive in order to prevent the deflationary expectations from becoming entrenched, in my view,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said.
The Producer Price Index (PPI) dropped far more than expected at 1.8% in August. The reduced PPI is due to decreasing consumer demand and confidence. Chinese consumers don’t trust the country’s producers anymore, especially in the housing sector.
The PBOC announced some measures to reinvigorate the economy but is considered far from enough by analysts. Last May, a $41 billion fund was issued to help local governments buy unallocated assets. The full extent of China’s real estate crisis, however, is priced at roughly $4 trillion of unsold properties.
But even if the PBOC acts immediately, it will take months or even years for the measures to have an effect. The 5% GDP growth goal self-imposed by the Chinese Communist Party at the beginning of the year is looking increasingly unlikely to materialize.
Finally, foreign sanctions are putting pressure on exports from China too. Exports are the largest driver of China’s GDP and have carried the Chinese economy during these times of crisis.
