China’s consumer prices slid deeper into deflationary territory last month, suffering their biggest drop since the global recession in 2009 and underscoring the huge challenges facing the economy.
The country’s Consumer Price Index (CPI) dropped by 0.8% in January from a year ago, according to the National Bureau of Statistics (NBS) on Thursday. It was the steepest fall since September 2009 and marks a fourth straight month of decline.
But analysts say the sharp drop was largely due to seasonal factors and the downturn may have already bottomed out.
The NBS, as well as some economists, said holiday demand in January 2023, when CPI rose 2.1%, played a part in making prices this year look particularly weak.
“[The] Lunar New Year falls in February this year compared with the end of January last year, causing distortions to the base,” HSBC economists said in a research note on Thursday.
Beijing is scrambling to revive consumer and investor confidence as it fights fires on several fronts, including a real estate slump, stock market meltdown and weaker exports. It fired its main stock market regulator Wednesday as anger grew over trillions wiped off shares in recent years.
Weak consumer demand last month also weighed on prices, the economists said.
Food prices in particular were a major drag on the index. The price of pork, a staple in the Chinese diet, plunged by 17.3% from a year ago, marking the biggest drop among all consumption items. Vegetable prices slid nearly 12%.
The Producer Price Index (PPI), which measures the cost of goods that factories charge wholesalers, decreased by 2.5% in January from a year ago, the NBS data showed. That was a slight pick up from December’s 2.7% drop.
Bottoming out?
Lynn Song, chief economist for Greater China at ING Economics, says consumer prices are likely to rise from February onwards.
“The base effects makes January’s data look worse than they are. Sequential data paints a more upbeat picture,” Song said.
Compared to December, the CPI actually rose by 0.3% in January, up for a second month in a row.
Prices are also likely to be driven by strong holiday demand this month, as the country celebrates the Lunar New Year, the most important and festive holiday, starting Saturday.
Millions of people will flock home to see their families for the holiday, in the world’s largest annual human migration. The migration is officially called the “Spring Festival Travel Rush” in China and often lasts 40 days.
“Keep in mind, this will be the first Lunar New Year to fully shake off the impact of Covid-19,” said the HSBC economists.
Preliminary data suggests more people are traveling now than before the pandemic.
On Tuesday, the 12th day of the travel rush, 2.2 million trips were made by air and 12.9 million trips by rail, according to figures from the Chinese transport ministry. The figures have jumped 17% and 23%, respectively, from 2019.
“This could point to more buoyant consumption demand during the holidays,” the HSBC economists said.
Prices for consumer services have risen in tandem. Tourism-related prices were up 1.8% in January from a year ago, according to the NBS on Thursday.
“We expect consumption to continue to be a pillar of support for the economy this year, with the strength in services consumption broadening out to more durable goods consumption,” the HSBC economists said.
Correction: A previous version of this story misstated the period of travel.
