'Deflation concerns' remain as China’s consumer inflation misses expectations

China's consumer inflation growth falls short of expectations as deflation concerns linger

China's consumer inflation growth unexpectedly slowed in November, missing market expectations and intensifying concerns about deflation amidst a weakening economy and stringent Covid rules.

Consumer Price Index (CPI) data shows inflation easing

According to data released by the National Bureau of Statistics (NBS) on December 9, the CPI, a key measure of consumer inflation, increased by 1.6% year-on-year in November, below the 2% forecast by economists polled by Reuters and October's 2.1% gain. The core CPI, which excludes volatile food and energy prices, rose 0.6% year-on-year, also below the 0.7% estimate and October's 0.8% increase.

Pork price decline contributes to slowdown

A major factor behind the slowdown in inflation was the continued decline in pork prices. Pork, a staple in the Chinese diet, saw prices fall by 3.7% year-on-year in November, following a 5.8% drop in October.

Weakening demand and strict Covid-19 measures weigh on inflation

Other factors contributing to the easing of inflation include weakening domestic demand as a result of the ongoing property market slump and strict Covid-19 measures that have dampened consumer spending. Retail sales growth slowed to 3.9% year-on-year in November, below the 4.6% increase in October and missing expectations of a 5% gain.

Deflation concerns arise as producer prices continue to fall

Falling producer prices are also raising concerns about deflation. The Producer Price Index (PPI), which measures the cost of goods sold by factories, declined by 1.3% year-on-year in November, marking the second consecutive month of contraction. This suggests that deflationary pressures may be spreading from the producer level to the consumer level.

Policy easing expected to counter deflation risks

In light of the subdued inflation outlook, economists expect the People's Bank of China (PBOC) to ease monetary policy further to support economic growth and counter deflation risks. This could include cuts to interest rates or measures to increase liquidity in the financial system.

Conclusion: ‘Deflation concerns’ remain as China’s consumer inflation misses expectations

The slowdown in China's consumer inflation and the continued decline in producer prices have raised concerns about the risk of deflation. While policymakers are likely to respond with easing measures, the persistence of deflationary pressures remains a challenge for the Chinese economy.