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The Guardian - UK
The Guardian - UK
Business
Kalyeena Makortoff and Graeme Wearden

China consumer prices plunge at fastest rate for 15 years as deflation fears deepen

A giant dragon lantern greets tourists near the frozen Houhai lake in Beijing.
A giant dragon lantern greets tourists near the frozen Houhai lake in Beijing. China will usher in the year of the dragon for lunar new year on 10 February. Photograph: Andy Wong/AP

China’s consumer prices fell at their fastest pace in 15 years in January, as the world’s second-largest economy sank deeper into deflation amid weakening demand.

Data released on Thursday showed that China’s consumer price index tumbled last month, falling by 0.8% compared with a year earlier. It marks the fourth consecutive month of declines, as well as the sharpest drop since September 2009, when the global economy was still grappling with aftershocks from the 2008 banking crisis.

Food prices were the biggest drag on the headline inflation figure, having fallen by 5.9% on an annual basis, due in part to a 17% slump in pork prices. Fresh vegetables fell by 12.7%, while fruit dropped by 9.1%.

China’s economy has been struggling to recover from the Covid-19 pandemic after restrictions were lifted in late 2022. It has also been dealt a significant blow by the contraction in its indebted property sector, leading to the developer Evergrande being ordered to liquidate last month.

China’s economy first entered deflation last summer, with prices falling at a faster pace since then. Its factories have also cut prices, with the latest producer price index pointing to a 2.5% drop in annual prices in January, after a 2.7% fall in December.

However, ING’s chief economist, Lynn Song, said it was worth noting that the latest data may be skewed due to the fact that lunar new year falls in February, rather than January, this year. It means that household demand for food such as pork could bounce back once next month’s data takes the holiday season into account.

“While a far cry from the above-target inflation levels seen in many other economies, these numbers do not imply China is stuck in a deflationary spiral,” Song said.

“Considering the more favourable base effects for February’s data, we see a high likelihood that January’s data could mark the low point for year-on-year inflation in the current cycle,” she added.

However, the prospect of fresh economic stimulus from Beijing to counter weaker demand was enough to send Chinese stocks higher on Thursday, with the Shanghai Composite rising by nearly 1.3%.

“While a very concerning sign for China’s economy, which could be becoming entrenched in a debt and deflation cycle, the markets arguably responded in a positive way to the news,” said Kyle Rodda, senior financial market analyst at capital.com.

“Perhaps markets see the terribly low number as a potential catalyst for more muscular monetary or fiscal stimulus from the central government, which, up until this point, has been moderate in applying countercyclical policy.”

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