The latest data from China’s National Bureau of Statistics reveals the country’s consumer price index (CPI) tumbled 0.8% year-on-year in January (economists polled by Reuters had forecast a 0.5% drop). This marks the fastest drop in consumer prices since 2009 when CPI fell 1.8% year-on-year in the aftermath of the 2008 financial crisis.
Food prices fell the most dramatically, dropping by 5.9% year-on-year due in large part to a 17% drop in pork prices. Fresh vegetables also fell by 12.7%, and fruit by 9.1%.
The concern is that if consumer prices continue in this direction, China’s economy could get stuck in a deflationary spiral. Lower prices can trigger a chain reaction of low production, lower income, and lower consumer demand, in turn leading to more price reductions, continuing the spiral downwards.
But the alarming January figures do not necessarily point to an imminent spiral. “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,” says ING Chief Economist, Lynn Song, who thinks that this year’s data could be skewed owing to Chinse New Year falling in February rather than January. An upsurge in household demand for certain goods could therefore show up in the February data.
Global markets have not reacted too negatively to the news, as analysts think the situation might put greater pressure on policymakers to unleash more fiscal stimulus, which has been moderate up to this point. Speaking to Reuters, Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, emphasized the need for more dramatic intervention soon. “China needs to take actions quickly and aggressively to avoid the risk of deflationary expectation to be entrenched among consumers.”