(Bloomberg) — China’s consumer prices fell at the fastest pace in three years, while production costs fell further into negative territory, underscoring the challenges facing economic recovery.
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The consumer price index fell 0.5% last month from a year earlier, the national statistics office said in a statement on Saturday. It was the biggest drop since November 2020 and smaller than the 0.2% drop projected by economists in a Bloomberg survey.
Producer prices fell 3%, compared to a forecast of a 2.8% drop. Ex-factory costs have remained mired in deflationary territory for 14 consecutive months.
China has struggled with falling prices for much of this year, unlike many other parts of the world where central banks are instead focused on controlling inflation. Bloomberg Economics expects deflationary risks to persist through 2024 as there are not enough catalysts to counter the housing crisis, which has dampened demand and prices.
Deflationary pressures have increased due to weak domestic demand, said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “This highlights the importance of more supportive fiscal policy.”
Deflation is dangerous for China because it can lead to a downward spiral in economic activity. Consumers may delay purchases as they expect prices to continue to fall, further weighing on overall consumption. Businesses may reduce production and investments due to uncertain future demand.
Deflation can also make monetary policies aimed at stimulating the economy less effective, as falling prices reduce companies’ revenues and make it harder for them to service their debt. The central bank has sought to downplay deflation risks this year, with an adviser to the People’s Bank of China saying last month that such pressures were “temporary.”
Stronger support
Beijing has recently turned to fiscal policy to boost domestic demand, unexpectedly increasing its budget deficit and encouraging banks to help local governments refinance their debt at lower interest rates to help them increase their spending capacity.
There are indications that fiscal support will strengthen in the coming year to help the recovery: China’s top leaders announced on Friday that these policies would be strengthened “appropriately” and stressed the importance of “progress » economic, suggesting that next year’s growth target could be ambitious. .
Read more: China’s Politburo raises expectations for ambitious 2024 GDP target
But it has been difficult for the government to compensate for falling demand from other sectors. The value of new home sales among China’s 100 largest developers fell 29.6 percent year-on-year in November.
Exports also remain weak, growing just 0.5% last month, well below the pace seen in recent years. Economists say it is too early to establish a floor for growth, with some predicting further pressures on the economy in 2024 due to ongoing challenges in the real estate sector.
The low CPI numbers are partly due to falling pork prices. A plentiful supply of pigs and sluggish consumption weighed on the market, prompting the government to take measures to support prices. Meat has a significant share in China’s CPI basket due to its popularity among local diners.
The so-called core CPI, which excludes volatile food and energy costs, rose 0.6% year-on-year in November, repeating the previous month’s performance.
CHINA REACTS: A deeper surprise deflation – Yes, a collapse in demand – No
China set an annual inflation target of around 3% this year, which it will almost certainly not miss. Economists have mixed views on the outlook for 2024, with some saying consumer prices could rise at a pace of around 1% as confidence improves, and others saying deflation will persist at first. semester.
According to Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc., proactive fiscal stimulus will be a critical part of China’s policy goals next year. The measures will have to “strike a balance between stimulating investment and consumption and limiting debt-related risks”. local governments.
–With help from Jill Disis and Yujing Liu.
(Updated with comments and additional details throughout)
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