China Consumer Prices Inch Up But Deflation Pressure Lingers

(National Bureau of Statistics)

(Bloomberg) -- China’s consumer prices eked out another small gain in June, hovering near zero for a fifth month, a sign that deflationary pressures continue to impede an economic recovery.

The consumer price index rose 0.2% from a year earlier, the National Bureau of Statistics said Wednesday. That compares with an increase of 0.3% in May and a median forecast of 0.4% in a Bloomberg survey of economists.

Companies’ rolling out promotions for the annual “618” shopping festival hurt the prices of entertainment-related consumer goods, household appliances and cars last month, the bureau said in a statement.

Factory-gate prices remained stuck in deflation, as they’ve been since late 2022, with the producer price index sliding 0.8% from a year earlier, matching the result expected by economists. The index declined 1.4% in May.

China’s economic recovery has been uneven this year, with manufacturing at times a bright spot while consumption has been hampered by a prolonged real estate slump and a weak job market.

The problems related to deflation can be serious, potentially leading to a downward spiral as people hold off on purchases due to expectations prices will continue falling. That could dent overall consumption and spill over to businesses.

“The risk of deflation has not faded in China. Domestic demand remains weak,” Zhiwei Zhang, chief economist at Pinpoint Asset Management. “In the long term, China will need a rebound of domestic demand to drive the economy.

Woei Chen Ho, an economist at United Overseas Bank Ltd., said that weak prices boost the odds of China easing monetary policy, including cuts to interest rates and the amount of money that banks must keep in reserve.

China has been leery of lowering rates because that would pile pressure on the yuan to weaken. A move by the Federal Reserve to cut first would create some room for the People’s Bank of China but Fed Chair Jerome Powell avoided offering a timeline for such a move when speaking to lawmakers Tuesday.

China’s onshore yuan was little changed at 7.2762 versus the dollar on Wednesday. The yield on the benchmark 10-year government bond hovered around 2.27%. Reaction in the stock market was also muted, with the benchmark CSI 300 Index closing down 0.3%.

Investors are looking to a key policy meeting of the ruling Communist Party next week for clues on Beijing’s long-term plans for addressing a broad range of issues. Second quarter growth figures will come on Monday.

Economists surveyed by Bloomberg forecast consumer prices to increase by 0.6% this year, a far cry from the 3% official target. 

--With assistance from Tania Chen and Zhu Lin.

(Updates market prices.)

©2024 Bloomberg L.P.