China's trade inflation figures this week is expected to indicate that the economy's recovery remains shaky, putting pressure on policymakers to provide additional assistance. CPI is predicted to grow 0.1% year on year in August, while PPI is expected to fall 0.3%.
The figures from July left no doubt. China is now plainly faced with a deflationary danger. For the first time since 2020, consumer and producer prices fell concurrently, raising concerns about the health of the world's second-largest economy.
The consumer price index dropped 0.3% last month from a year earlier, the National Bureau of Statistics said on Wednesday, marking its first decline since February 2021. Economists surveyed by Bloomberg had predicted a 0.4% decline in prices.
Figure 1: China’s Producer Prices Decline. Source: National Bureau of Statistics
Instead of the substantial price increases projected by some analysts at the start of the year, China is witnessing a unique period of price declines. This stands in stark contrast to the soaring inflation that accompanied the reopening of the US and other major economies, and it is seen both at the factory gate and at the retail level.
Producer prices have been contracting on a year-on-year basis since October 2022, largely due to falling prices for commodities such as coal and crude oil.
The buildup of supplies during the pandemic and in the first quarter, amid a burst of confidence following the termination of Covid restrictions, has been a major driver of low pricing this year. This has recently been reversed, with businesses lowering their prices in order to minimize their inventory.
If prices continue to fall over a wide range of commodities for an extended period of time, customers may postpone purchases, further slowing economic activity and compelling businesses to continue lowering prices. This, in turn, would reduce revenue and earnings, pushing enterprises to reduce investment and job creation, culminating in the type of economic stagnation that Japan has experienced for decades.
Some experts predict that consumer inflation will continue to fall for a few months before rising towards the end of the year as the greater base of comparison with last year fades and domestic demand rises. Bloomberg polled economists estimate full-year inflation to be 0.8% in 2023, the weakest rate since 2009.
China slid into deflation in July, adding pressure on policymakers to step up monetary and fiscal support even as signs that the decline in prices is temporary may limit any stimulus.
Investors expect the People's Bank of China to inject more monetary stimulus, such as interest rate cuts in response to the weak inflation figures. However, the central bank is constrained by various factors, including a lower yuan and high levels of debt in the economy. Given the financial challenges that many municipal governments are under, fiscal support has likewise been minimal.
China's economy grew at a 3% annual rate last year, one of the slowest rates in decades as economic controls and a property crisis hammered the country. Its eventual reopening gave hope that the economy will improve this year.
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