China’s December inflation figures have raised new concerns about deflationary forces, highlighting the challenges that the second largest economy in the world faces as it struggles with weak demand at home.
China’s Consumer Inflation is declining
According to the National Bureau of Statistics, China’s Consumer Price Index (CPI), rose by just 0.1% in December compared with last year.
This reading was in line with consensus expectations, but it marked a slower pace than the 0.2% rise recorded in November.
The Core CPI (which excludes volatile energy and food prices) rose by 0.4% on an annual basis, a slight improvement from the 0.3% increase in January.
CPI was flat on a monthly basis, as opposed to a decline of 0.6% in November.
Inflation is influenced by food prices
The favorable weather has led to a 0.6% drop in food prices.
Prices of fresh vegetables and fruit fell by 2.4%, respectively.
The price of pork, which is a key component in China’s CPI basket fell by 2.1% on a monthly basis, but was still high year-onyear at 12.5%.
Wholesale Prices Continue to Fall
In December 2018, the Producer Price Index (PPI), which measures inflation in producer prices, fell by 2.3% on an annual basis. This is the 27th month consecutively that PPI has declined.
This figure was slightly better than Reuters’ expectations, which were for a drop of 2.4%.
PPI fell 0.1% on a monthly level, following a rise of 0.1% in November.
The NBS states that the suspension of infrastructure and real-estate projects during off-season has reduced the demand for steel, among other materials.
Why are deflation fears in China so high?
China is still struggling with a subdued demand at home, and the near-zero inflation in consumer prices reflects this. This has led to fears about a spiraling deflation.
The consumer spending is still not improving despite the various stimuli measures taken by Beijing in September, such as interest rate reductions, increased lending to banks, assistance for stock markets and real estate, etc.
China launched a scheme for consumer trade-ins earlier this week to promote equipment upgrades, and to provide subsidies. The aim is to further stimulate the consumption.
China’s Economic Recovery
Some economic indicators indicate a possible recovery.
The factory activity increased for three months in a row, but at a lower pace during December.
The administration of President Xi Jinping has made boosting the domestic demand a priority issue for 2025. This is only second time since over a decade ago that this has been a major concern.
The authorities have committed to increase public borrowing, fiscal spending and monetary ease to boost growth.
The onshore Chinese yuan fell to a record low against the US Dollar on Wednesday. This was due to a strong dollar and rising US Treasury yields.
China is facing a number of challenges as it tries to fight deflation, and re-ignite the growth.
In the coming months, it will be crucial to determine whether Beijing can successfully counter deflationary forces and revive domestic demand.
As new information becomes available, this post Deflation Fears Grow as China’s Inflation Nears Zero in December could be updated.
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