China’s deflationary pressures intensified in May, with both producer and consumer prices falling further as the country struggles with sluggish demand, ongoing trade tensions, and a weakening property market.
The producer price index (PPI) dropped 3.3% year-on-year, marking the steepest decline in nearly two years and exceeding April’s 2.7% fall. This surpassed the 3.2% drop predicted in a Reuters poll, underlining continued challenges in industrial profitability. The consumer price index (CPI) also dipped 0.1% annually for the second consecutive month, slightly beating expectations of a 0.2% decline. On a monthly basis, CPI fell 0.2%, reversing April’s modest 0.1% rise.
Economists point to weak domestic consumption and fierce competition as key deflationary drivers. Zhiwei Zhang of Pinpoint Asset Management cited ongoing price wars in the auto sector and falling property prices as critical concerns. Despite stimulus efforts, cautious consumer behavior and softening factory output continue to drag on the economy.
Tensions with the U.S. have also weighed heavily on sentiment. As trade talks resume in London, Thursday’s phone call between Presidents Xi Jinping and Donald Trump offered little clarity, keeping global investors on edge.
Meanwhile, retail sales growth slowed as households remained hesitant amid job insecurity and stagnant home prices. Core inflation, which excludes food and energy, rose 0.6% year-on-year—only a marginal improvement over April’s 0.5%.
According to Capital Economics’ Zichun Huang, the slight uptick in core inflation remains fragile. She warned that structural overcapacity could keep China in a deflationary cycle through 2025, signaling further potential for policy easing.
As Beijing weighs its next steps, markets will closely watch for stronger fiscal and monetary measures to stabilize prices and boost domestic demand in the months ahead.