Consumer prices in China fell to their lowest level in more than a year, raising concerns over persistent deflationary pressures in the world’s second-largest economy. The Consumer Price Index (CPI) dropped by 0.7% in February compared to the previous year, according to China’s National Bureau of Statistics (NBS). The decline reversed January’s 0.5% increase and was sharper than expected, marking the first contraction since January 2024.
Impact of Deflation on the Economy
Deflation reduces incentives for consumers to spend, as they anticipate lower prices in the future, which in turn dampens economic growth. The February decline was partly influenced by an earlier Lunar New Year holiday, which boosted tourism and spending in January instead of February.
According to the NBS, consumer prices would have risen by 0.1% if the effect of the earlier holiday was excluded. Core CPI, which excludes volatile food and fuel prices, declined by 0.1%—the first decrease since January 2021.
Factory-Gate Prices Continue to Contract
The Producer Price Index (PPI), which measures wholesale prices, fell 2.2% in February compared to the previous year. Factory-gate prices have now been contracting for 29 consecutive months since October 2022.
“Both CPI and PPI inflation have remained too low over the past two years, underscoring supply and demand imbalances in China’s economy,” Goldman Sachs economists noted in a research report.
Challenges for China’s Economy
China’s economic recovery continues to face challenges, including weak consumer spending, an uncertain employment outlook, and a prolonged downturn in the property sector. Internationally, China is under pressure as trade tensions with the United States escalate.
“The uncertainty of the external environment is increasing, while we also face issues such as insufficient domestic demand and operational difficulties for some industries,” said Zheng Shanjie, head of China’s state planner, the National Development and Reform Commission.
Government Response
Beijing has set an ambitious 5% economic growth target for 2025, the same as last year. It has also lowered its consumer price increase target to 2%, down from 3% in 2024, acknowledging continued deflationary pressure. However, despite calls for stimulus, no major spending programs were announced at the recent National People’s Congress.
At a press conference, Wang Xiaoping, China’s Minister of Human Resources and Social Security, admitted that stabilizing and expanding employment remains a major challenge. Meanwhile, Ni Hong, Minister of Housing and Urban-Rural Development, emphasized the government’s commitment to stabilizing the real estate sector. The government has allocated 4.4 trillion yuan ($608 billion) in special bonds for local governments, with part of the funds designated for converting commercial housing into affordable housing and worker dormitories.
