Chinese economy slips into deflation as recovery falters and demand slows | China

Chinese consumer prices slipped into deflation last month for the first time in more than two years, official data showed, as slowing domestic spending weighed on the country’s post-Covid economic recovery.

The Consumer Price Index, the main gauge of inflation, fell 0.3 points in July, the National Bureau of Statistics said, having flatlined in June. A survey of analysts had anticipated a 0.4 percent year-on-year decline.

July’s data is China’s first negative inflation reading since early 2021, when prices were weaker as the Covid-19 pandemic hit demand, and pork prices fell.

The figures come a day after data was released showing the country’s imports and exports both fell more sharply than expected in July, as global demand for Chinese products wanes.

Chinese retailers have been hit by a slowdown in sales. This means retailers who stocked up on goods expecting a surge in demand after pandemic restrictions were lifted are now under pressure to cut prices.

The cost of cars has also fallen, after price cuts from Tesla triggered a price war, with other brands lowering their prices too.

China’s factories are already charging less for their goods, as they react to weakening demand after commodity prices fell. China’s producer price inflation, which tracks prices at the factory gate, was -5.4% year-on-year in June.

Authorities have downplayed concerns about deflation. Liu Guoqiang, deputy governor of the central bank, last month said there would be no deflationary risks in China in the second half of the year, but noted the economy needs time to return to normal after the pandemic.

The government has set a consumer inflation target of around 3% this year.

Despite recent policy stimulus, consumers and manufacturers remained cautious amid the still-weak housing market and high youth unemployment, and a diminishing appetite among foreign firms to invest in China.

Falling prices may sound attractive to consumers in the west, where inflation hit its highest levels in decades last year. In the UK, consumer prices were 7.9% higher than a year ago in June, as households suffered a long run of falling real incomes.

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