January saw China’s consumer prices fall at their sharpest rate in 14 years, indicating a worsening deflation problem. The National Bureau of Statistics explained the deflation numbers as a result of the floating holiday effects, given the occurrence of Lunar New Year in January 2023 versus this year’s February date. However, the figures suggest potential spillover for the global economy. Despite forecasting a decline of only 0.5%, China’s January CPI fell 0.8% compared to the year before. On an annualized month-over-month basis, consumer prices fell by 4.3%, with particular weakness in food prices. Measurements for January also showed that pork prices fell 17.3%, vegetable prices fell 12.7%, and fruit prices fell 9.1%. The producer price index likewise dropped by 2.5%, while service prices climbed at only half the rate seen in December.
The disinflationary pressure from the ongoing property downturn points to a delayed reflation path for China, according to strategists at Goldman Sachs in a Thursday note. The deflation suggests weak consumer demand and confidence, which is a symptom of the ongoing property market crisis in China.
Chinese households have most of their wealth tied to real estate, and the downbeat, uncertain outlook has led people to spend less and save more, making it more difficult to reverse the fall of consumer prices. Foreign investors have been leaving Chinese markets over the past year, and ongoing deflation could spell trouble for earnings of Chinese companies.
Policymakers will need to provide more clarity on potential stimulus measures when the national budget is released in March to address these issues.
Researchers at the Institute of International Finance wrote in a recent report that China is at risk of a “debt-deflation spiral.” Tumbling prices have hurt corporate earnings, stock prices, wage growth, and tax revenues in their view.
Should policymakers fail to act, deflation expectations could become even more entrenched, further weakening domestic demand and repelling foreign investment.
In summary, China’s latest data shows that consumer prices tumbled at their sharpest rate in 14 years due to floating holiday effects from Lunar New Year celebrations happening earlier this year than usual. This indicates a worsening deflation problem caused by weak consumer demand and confidence due to an ongoing property market crisis that has left households with little spending money left over after saving it all up due to uncertainty about future prospects.
With foreign investors already leaving Chinese markets over concerns about ongoing deflation, policymakers must act quickly with clarity on potential stimulus measures when releasing the national budget later this month if they want to prevent further weakening domestic demand and attract foreign investment back into China’s struggling economy