China’s August Consumer Price Index (CPI) rose less than expected, while the Producer Price Index (PPI) for industrial goods saw a widened decrease. These indicators suggest that domestic demand in China remains weak, with deflationary pressures continuing to intensify.
According to data released by the Chinese National Bureau of Statistics on Monday, the Consumer Price Index (CPI) in August increased by 0.6% year-on-year, slightly below the 0.7% expected by analysts. The main reason for the increase was attributed to adverse weather conditions pushing up food prices, rather than a revival in domestic demand.
Excluding the volatile food and energy costs, the core CPI rose by 0.3%, the lowest level since March 2021, indicating sustained weak overall demand.
Meanwhile, the Producer Price Index (PPI) fell by 1.8% year-on-year, compared to a 0.8% decline in July and below analysts’ expectations of a 1.4% decrease, continuing a long-term downward trend since the end of 2022.
Michelle Lam, an economist at Societe Generale SA, mentioned that inflationary pressures in China are becoming more entrenched, potentially leading to a downward spiral in prices and wages, necessitating more aggressive policy actions.
Despite the Chinese authorities’ habit of concealing real data, official figures still paint a bleak economic outlook. With the real estate sector mired in a long slump, high unemployment rates, local debt woes, and escalating trade tensions, the Chinese economy continues to struggle in the second half of the year, complicating Beijing’s economic policy decisions.
Weak consumer and investment demand have led to intense price wars in industries like electric vehicles and solar energy. Consumer postponements and wage cuts by businesses have weakened hopes for China to achieve its target of around 5% economic growth.
The deadly floods in many parts of China this summer, coupled with scorching temperatures pushing up agricultural prices, have accelerated inflation. According to official reports, the affected agricultural land in China reached 1.46 million hectares in August.
In August, food prices rose by 2.8% year-on-year, remaining steady from July, while non-food inflation was at 0.2%, lower than the 0.7% in July.
Junyu Tan, an economist at Coface for North Asia, mentioned that the rebound in prices is lower than expected and has limited impact in alleviating deflation concerns. He emphasized that persistent deflationary pressure is largely attributed to the broader issue of overproduction, where supply continues to exceed demand.
Gabriel Ng, an economist at Capital Economics, believes that increased fiscal spending will boost domestic demand in the coming months. However, he cautioned that the government’s policy focus on investment may exacerbate the issue of overcapacity in the long run, despite the anticipated rise in fiscal expenditure.
This analysis is based on reports from Reuters, Bloomberg, and the Financial Times.