Deflationary pressures in China have eased, and further steps are expected to stimulate demand

BEIJING (Reuters) – China’s consumer prices returned to positive territory in August while price declines at the factory door slowed, with deflationary pressures easing amid signs the economy is stabilizing, data showed on Saturday.

But analysts say more policy support is needed to support consumer demand in the world’s second-largest economy, with the labor market recovery slowing and the outlook for household incomes uncertain.

The National Bureau of Statistics said the consumer price index rose 0.1 percent in August from a year earlier, slower than the average estimate for a 0.2 percent increase in a Reuters poll. The CPI fell 0.3% in July.

Core inflation, which excludes food and fuel prices, was unchanged at 0.8% in August.

The Producer Price Index (PPI) fell 3.0% from a year earlier, in line with expectations, after a 4.4% decline in July. The decline in factory prices was the smallest in five months.

“There is little improvement in the inflation profile. At the same time, the PPI deflator appears to be narrowing, indicating a slow and moderate recovery process,” said Zhou Hao, chief economist at Guotai Junan International.

“In general, inflation (rate) still indicates weak demand and requires further policy support in the foreseeable future.”

The office said food prices fell 1.7% year-on-year while non-food costs rose 0.5% – led by higher tourism-related costs.

Recent floods have damaged corn and rice crops in the main grain-producing belt of northern China, raising concerns about domestic food price inflation as consumers around the world face food supply shortages due to the war in Ukraine.

“Both the CPI and PPI are likely to show modest improvements in the fourth quarter,” said Luo Yunfeng, an economist at Huajin Securities.

Shrinkage pressures

Compared with the previous month, the consumer price index rose 0.3%, up from 0.2% in July, the statistics office said.

Pork prices rose by 11.4% on a monthly basis, compared to no change in July, due to the impact of severe weather in some areas. They fell 17.9% from a year earlier, narrowing from a 26% decline in July.

The statistics office said that contraction at the factory door eased in August due to improved demand for some industrial products and higher global crude oil prices.

China’s meager price changes stand in sharp contrast to the rise in inflation most other major economies have seen since the COVID-19 pandemic diminished, forcing their central banks to quickly raise interest rates.

China in July became the first G20 country to report a year-on-year decline in consumer prices since Japan’s last negative CPI reading in August 2021.

China’s exports and imports pared declines, August trade data showed, joining a string of other indicators showing a potential stabilization in the economic slowdown, as policymakers seek to stimulate demand and stave off deflation.

“With early signs of growth stabilizing, we see deflationary pressures easing, a trend reflected in higher commodity prices in August,” ANZ analysts said in a note.

Beijing has announced a series of measures in recent months to support growth, including mortgage interest rate cuts and the easing of borrowing rules last week by authorities to help homebuyers.

Bruce Pang, chief economist at Jones Lang LaSalle, said China’s central bank could continue to cut interest rates and bank reserve requirement ratios.

Premier Li Qiang said this week that China is expected to achieve its 2023 growth target of about 5%, but some analysts believe the target may not be achieved due to a worsening real estate decline, weak consumer spending and declining credit growth.

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