China exits deflation phase in another sign of a stabilising economy

Analysts say more policy support is needed to shore up consumer demand, with a labour market recovery slowing and household income expectations uncertain

Customers at a wet market in Beijing. Food prices in China fell 1.7 per cent on year while non-food costs rose 0.5 per cent, led by rising costs linked to tourism. Bloomberg

China's consumer prices returned to positive territory in August, while factory gate price declines slowed, data showed on Saturday, as deflation pressures ease amid signs of stabilisation in the economy.

But analysts said more policy support is needed to shore up consumer demand in the world's second-biggest economy, with a labour market recovery slowing and household income expectations uncertain.

The consumer price index rose 0.1 per cent in August from a year earlier, the National Bureau of Statistics said, slower than the median estimate for a 0.2 per cent increase in a Reuters poll. CPI fell 0.3 per cent in July.

Core inflation, which excludes food and fuel prices, was unchanged at 0.8 per cent in August.

The producer price index fell 3 per cent from a year earlier, in line with expectations, after a drop of 4.4 per cent in July. The drop in factory prices was the smallest in five months.

“There is a bit of improvement in the inflation profile. In the meantime, the PPI deflation appears to be narrowing, pointing to a slow and moderate restoring process,” said Zhou Hao, chief economist at Guotai Junan International.

“In general, the inflation [rate] still points to weak demand and requires more policy support for the foreseeable future.”

Food prices fell 1.7 per cent year-on-year while non-food costs rose 0.5 per cent – led by rising costs linked to tourism, the bureau said.

Recent floods have damaged corn and rice crops in China's northern grain-producing belt, sparking domestic food inflation fears as consumers worldwide face tightening food supplies caused by the war in Ukraine.

“Both CPI and PPI are likely to show modest improvements in the fourth quarter,” said Luo Yunfeng, an economist at Huajin Securities.

Compared with the previous month, CPI rose 0.3 per cent, picking up from 0.2 per cent in July, the statistics bureau said.

Factory-gate deflation moderated in August as a result of improving demand for some industrial products and rising international crude oil prices, the statistics bureau said.

China's anaemic price changes contrast sharply with the surging inflation most other major economies have faced since the end of the coronavirus pandemic, forcing their central banks to rapidly raise interest rates.

China in July became the first of the Group of 20 wealthy nations to report a year-on-year decline in consumer prices since Japan's last negative headline CPI reading in August 2021.

August trade data showed China's exports and imports both narrowing their declines, joining a run of other indicators showing a possible stabilisation in the economic downturn, as policymakers seek to spur demand and fend off deflation.

“With early signs of growth stabilisation, we see deflationary pressures easing, a trend reflected in higher commodity prices in August,” ANZ analysts said in a note.

A customer scans a QR code to purchase vegetables at a wet market in Beijing. China's anaemic price changes contrast sharply with the surging inflation most other major economies have seen since the Covid-19 pandemic waned, forcing their central banks to rapidly raise interest rates. Bloomberg

Beijing has announced a series of measures in recent months to shore up growth, including mortgage rate cuts and the easing of borrowing rules last week by the authorities to aid homebuyers.

China's central bank could continue to cut interest rates and bank reserve requirement ratios, said Bruce Pang, chief economist at Jones Lang Lasalle.

Premier Li Qiang said this week that China is expected to achieve its 2023 growth target of around 5 per cent, but some analysts believe the target could be missed because of a worsening property slump, weak consumer spending and tumbling credit growth.

Updated: September 09, 2023, 1:28 PM