China's consumer prices rise after 6-months, deflation trend not fully reversed

Consumer prices in China have rebounded after a six-month decline, driven primarily by heightened spending during the Lunar New Year holiday. Official data unveiled a 0.7% uptick in the Consumer Price Index (CPI) for February, surpassing the 0.3% forecast from a Reuters poll. This marks the first increase since August 2023, when the index experienced its swiftest decline in 15 years.

However, analysts caution against prematurely interpreting this uptick as an end to deflationary trends, attributing part of the year-on-year increase to the timing of the Lunar New Year holiday. Zhiwei Zhang, President and Chief Economist for Pinpoint Asset Management, underscored the lingering weakness in domestic demand, suggesting that deflationary pressures remain a concern.

Over the past year, China has grappled with subdued prices due to factors such as a property downturn, stock market fluctuations, and tepid consumer sentiment. Despite efforts by the People's Bank of China (PBOC) to stimulate lending through interest rate cuts, inflation has remained well below the official target of 3%, reaching just 0.2% in 2023.

Deflation poses significant risks to the economy, potentially prompting consumers and businesses to postpone purchases or investments in anticipation of further price declines. This could set off a downward spiral of reduced spending, increased business cutbacks, and higher unemployment rates.

Although service prices surged in February, particularly in tourism and entertainment sectors, analysts anticipate a decline in CPI inflation in March as the holiday effect diminishes. However, producer deflation intensified, with the Producer Price Index (PPI) dropping by 2.7% year-on-year for the 17th consecutive month, signaling ongoing deflationary pressures in upstream industries and subdued consumption demand.

Beijing faces the challenging task of stimulating economic growth and countering deflation, with Premier Li Qiang setting this year's growth target at around 5% and inflation target at 3%. However, the government also stresses the importance of debt control and economic growth model transformation, which might lead to less aggressive infrastructure investments by local governments.

PBOC Governor Pan Gongsheng expressed support for monetary easing, hinting at potential further rate cuts to bolster the economy. Additionally, the government plans initiatives to encourage consumer spending, including large-scale equipment upgrades and replacing old durable goods with new ones.

Analysts stress the significance of effective policy implementation in stimulating demand and fostering confidence for sustainable growth and price stability. With the conclusion of the National People's Congress, attention shifts to demand-side initiatives, particularly the proposed trade-in program for durable goods.