Chinese CPI Trying to Buck the Deflation Trend

Jacob Hess

October 12, 2023

• Inflation
• China

The latest data on Chinese inflation for both consumers and producers continues to reflect a struggling economy, despite expectations for some improvement. CPI growth had only recently recovered from a slightly deflationary trend observed during the summer, registering -0.2% YoY in July and accelerating to 0.1% YoY in August. However, the latest data for September shows no growth on an annual basis, indicating that consumer prices threaten to resume a downward trend. On a more positive note, the monthly rate of CPI growth has stabilized over the last three months, growing around 0.2-0.3% MoM from July to September. This consistency at the monthly rate should help inflate prices to a more normal level in the near future.

Food and consumer goods prices have been the main sources of deflationary pressure, declining by -3.2% YoY and -0.9% YoY, respectively. When food is excluded from the equation in the calculation of core CPI growth, prices appear healthier at 0.8% YoY, primarily due to a growth of 1.3% YoY in the services sector. However it is worth noting that on a monthly rate, services prices edged down by -0.1% MoM. This is particularly concerning if it serves as a broader signal of weakness in services activity, which is supposed to be the main driver of economic growth.

Further up the pipeline, pricing and profit margins for producers continue to be weak. While input and output producer prices have grown at the strongest monthly rates so far this year, on an annual basis, PPI remains deflationary. The most significant downward pressure on PPI comes from extracted commodity prices, which are down -7.4% YoY, and raw materials, down -2.8% YoY. Both categories did see substantial improvements in September. Consumer durables and production prices are also weak, registering -1.2% YoY and -3.0% YoY, respectively, and saw less of an acceleration in September.

The Chinese economy seems to be in need of additional support, but the options for monetary intervention may have already been exhausted. The silver lining in this challenging economic landscape is that the monthly rates suggest some life is coming back into firms’ pricing power. This could potentially help inflation rates reach a healthier level by the end of the year. Nonetheless, the overall picture remains one of an economy in desperate need of support, with inflation metrics serving as a critical barometer of China's systemic challenges.