China’s consumer inflation dropped far more than expected to fall below zero for the first time in 13 months, an assessment skewed by seasonal distortions but also a sign of deflationary pressures persisting in the economy.
The consumer price index (CPI) declined 0.7 per cent in February from a year earlier, the National Bureau of Statistics said on March 9, compared with a 0.5 per cent gain in January.
That was lower than all but one forecast in a Bloomberg survey of analysts, whose median estimate was for a 0.4 per cent drop.
Even when adjusted for the effect of an earlier than usual Chinese New Year holiday, consumer inflation slowed to among the weakest levels in months, according to Goldman Sachs Group.
Symptoms of sluggish consumption included a decline in services prices, combined with a rare negative reading for core inflation.
China’s core CPI, which excludes volatile items such as food and energy, fell for the first time since 2021 with a drop of 0.1 per cent – only the second time the gauge has contracted over more than 15 years.
Factory deflation extended into a 29th month.
“China’s economy still faces deflationary pressure,” said Pinpoint Asset Management president and chief economist Zhiwei Zhang, who added: “Domestic demand remains weak.”
The statistics bureau said a key factor for the decline in inflation was the effect of a high base from a year earlier, created by elevated prices caused by spending during the Chinese New Year.
The festival is a moving holiday, and it fell entirely in February 2024 but ran from Jan 29 into February in 2025.
When accounting for seasonality, the statistics bureau estimates consumer inflation actually rose 0.1 per cent from a year earlier in February, according to a statement published on March 9.
Goldman economists estimate the earlier holiday brought year-over-year CPI inflation down by 0.7 percentage point in February.
A clearer read on China’s inflation trajectory will emerge in March, as investors look for signs that the government’s stimulus is translating into stronger domestic demand.
The country is on track for the longest streak of economy-wide price declines since the 1960s as a result of weak spending, while the property crash has yet to bottom out.
China has set its inflation target at the lowest level in more than 20 years and now aims to bring consumer price growth to around 2 per cent in 2025 – down from the previous 3 per cent target.
It is a signal top leaders are finally recognising the deflationary pressures weighing on the world’s second-largest economy, with consumer inflation stuck at just 0.2 per cent for the past two years.
Urgency has grown for the government to reflate the economy.
At the annual Parliament session on March 5, China announced an ambitious economic growth goal of about 5 per cent for 2025, despite the threat of an intensifying trade war with the US.
Beijing also laid out plans to boost fiscal stimulus and domestic consumption.
Still, Bloomberg’s calculations based on China’s deficit estimates show nominal economic growth is expected to be around 5 per cent in 2025, matching Beijing’s inflation-adjusted target.
The outlook suggests officials anticipate little to no overall inflation. BLOOMBERG
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