China Deflation Pressures Worsen After Latest CPI Figures

In March 2023, China's consumer and producer inflation showed limited growth, indicating that the country's economic recovery may need additional support in the form of monetary or fiscal stimulus. This suggests that China’s current economic policies may not be enough to spur growth, and that further measures may be necessary to strengthen the economy.


The National Bureau of Statistics reported that the consumer price index increased by 0.7% year-on-year last month, falling short of the 1% projection made by economists in a Bloomberg survey. Meanwhile, producer prices continued to decline, reaching 2.5%, its worst since June 2020. Excluding volatile food and energy prices, core inflation saw a slight increase from 0.6% to 0.7%.



China CPI and PPI chart data

China CPI and PPI data, National Bureau of Statistics, Bloomberg



Given the decline in China’s inflation rate and the potential conclusion of interest rate hike phase in the United States, it is likely that the People's Bank of China will opt for a rate cut to bolster the nation's economic growth prospects.


"The PBOC just cut the RRR by 25bp at the end of March. However, Beijing still has no appetite to launch a massive stimulus on concerns of distortions and financial risks," analysts at Nomura said.


The main factors behind this were the declines in food and fuel inflation. Although we anticipate some inflationary pressures to resurface as the labor market becomes tighter, it is likely that inflation will stay below the government's threshold of approximately 3%, and the rise will be significantly smaller compared to other economies that eased virus restrictions.


Despite the relaxation of anti-Covid measures and government initiatives to boost spending, the data indicated that consumer spending continued to lag behind. As a crucial driver of the Chinese economy, consumer spending has yet to fully rebound from the COVID-19 pandemic, a result of the country’s three years under lockdown.




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