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China inflation: demand-led reflation ‘may yet take hold’ as consumer prices suffer steepest fall since 2009

In China, the downward trend in the consumer price index (CPI) continued for the fourth consecutive month in January, while factory-gate prices also saw their 16th straight month of decline. This prolonged decline has raised concerns about the possibility of deflation in the country, driven by factors such as a slower-than-expected economic recovery, reduced prices for food and energy, and an extended downturn in the property market.

The National Bureau of Statistics (NBS) reported that China’s CPI dropped by 0.8 percent year-on-year in January, a sharper decline than anticipated and the most significant since September 2009. Food prices remained a primary contributor to the decline, with NBS chief statistician Dong Lijuan attributing the year-on-year drop to a high base from the previous year’s Lunar New Year holiday.

Looking ahead, economists predict a potential mild reflation in 2024, supported by favorable low base effects and the gradual alleviation of supply-side distortions such as low prices for pork and automobiles. However, sluggish consumer confidence may impede a demand-driven reflation.

Despite the global trend of rising inflation following the pandemic, China faces the opposite challenge of growing deflationary risks. Structural economic issues, including high local government debt and a general slowdown in growth, further contribute to concerns about prolonged disinflation, reminiscent of Japan’s experience in the 1990s.

While the People’s Bank of China (PBOC) downplays immediate concerns about deflation, citing stable core inflation and faster economic growth compared to developed countries, volatility in food and energy prices continues to impact overall price levels in China.

In summary, China’s ongoing deflationary pressures underscore the complexities of its economic landscape, presenting policymakers with challenges in maintaining price stability and fostering sustainable growth.

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