China posts fastest deflation in three years

The pace of consumer price drops in China accelerated last month, indicating that the country’s post-pandemic economic recovery may take longer than previously expected, according to data from China’s National Bureau of Statistics published on Saturday.

The consumer price index (CPI) fell 0.5% in November from a year earlier, the biggest drop since November 2020. Consumer prices have partly been affected by a decline in pork prices, a significant component in China’s CPI basket due to its popularity among the population. Overall food prices in the country plunged by 4.2% last month.

Producer prices, which are greatly dependent on the cost of commodities and raw materials, also dropped – by 3%. They have been in negative territory for the past 14 months.

Zhang Zhiwei, chief economist at Pinpoint Asset Management, says deflationary pressures have been on the rise due to weak domestic demand.

“This highlights the importance of more supportive fiscal policy,” he said in a note to Bloomberg.

While the majority of global economies have been struggling to battle inflation this year, China’s falling prices could be no less dangerous, analysts warn. Deflation can lead to a slowdown in economic activity and stall growth, as consumers are likely to purchase less, expecting prices to fall further, while businesses might start to cut production and investment due to plunging demand.

Most economists expect China to miss its annual inflation target of around 3% this year, and warn that deflation is likely to persist into the first half of 2024.

China’s economic recovery has been slow this year, amid problems ranging from a troubled housing market to local government debt risks. It was also affected by slow global growth. Chinese government advisers are expected to demand more fiscal stimulus to reach next-year’s 4.5% to 5.5% growth targets at the annual policymakers’ meeting, the ‘Central Economic Work Conference,’ scheduled for later this month.

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