China's consumer inflation turns negative, raising deflationary concerns

Factory deflation extended into a 29th month, though the producer price index recorded a slower drop of 2.2 per cent compared to January's negative 2.3 per cent

By Bloomberg News

 

China’s consumer inflation dropped below zero for the first time in 13 months, a reading skewed by seasonal distortions but also a reminder of persistent deflationary pressures in the economy.

The consumer price index declined 0.7 per cent from a year earlier, the National Bureau of Statistics said Sunday, compared with a 0.5 per cent gain in the previous month. The median forecast of economists surveyed by Bloomberg was a 0.4 per cent drop. 

 

China’s core CPI, which excludes volatile items such as food and energy, decreased for the first time since 2021 with a drop of 0.1 per cent — only the second time the gauge has contracted over more than 15 years. Factory deflation extended into a 29th month. 

 

“China’s economy still faces deflationary pressure,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. “Domestic demand remains weak.” 

 

The statistics bureau said a key factor for the decline in inflation was the effect of a high base from a year earlier, created by elevated prices caused by spending during the Lunar New Year. 

 

The festival had an earlier-than-usual start in 2025. It’s a moving holiday that fell entirely in February 2024 but ran from Jan. 28 to Feb. 4 this year.  When adjusted for seasonal swings, the statistics bureau estimates consumer inflation actually rose 0.1 per cent from a year earlier in February, according to a statement published on Sunday. 

A clearer read on China’s inflation trajectory will emerge in March, as investors look for signs that the government’s stimulus is translating into stronger domestic demand. The country is on track for the longest streak of economy-wide price declines since the 1960s as a result of weak spending, while the property crash has yet to bottom out.

 

China has set its inflation target at the lowest level in over 20 years and now aims to bring consumer-price growth to around 2 per cent in 2025 — down from the previous 3 per cent target. It’s a signal top leaders are finally recognizing the deflationary pressures weighing on the world’s second-largest economy, with consumer inflation stuck at just 0.2 per cent for the past two years. 

What Economics says

“China’s weaker-than-expected February price data highlight slack demand and an urgent need for policymakers to deliver on pledged stimulus quickly. Without a powerful boost from fiscal and monetary policies, deflationary pressures will continue to weigh on the economy.” 

— David Qu, economist.

Urgency has grown for the government to reflate the economy. At the annual parliament session Wednesday, China announced an ambitious economic growth goal of about 5 per cent for 2025, despite the threat of an intensifying trade war with the US. Beijing also laid out plans to boost fiscal stimulus and domestic consumption.

 

Still, Bloomberg’s calculations based on China’s deficit estimates show nominal economic growth is expected to be around 5 per cent this year, matching Beijing’s inflation-adjusted target. The outlook suggests officials anticipate little to no overall inflation.    

Highlights from inflation data

• The producer price index declined 2.2 per cent in February from a year earlier — slightly more than forecast and compared with a 2.3 per cent decrease in January
• Food inflation slumped 3.3 per cent, the most since January 2024, after a 0.4 per cent increase the prior month
• Consumer goods costs fell 0.9 per cent, while services prices slipped 0.4 per cent
• The price of so-called new-energy vehicles, which includes electric cars and hybrid models, fell 6 per cent from a year earlier