When will China deflation have a higher weight in policy calculation?
Investing.com -- China's deflationary pressures have become a growing concern, as recent data continues to reveal widespread price declines and weak demand. Despite some reflationary attempts, policymakers remain focused on real GDP growth rather than nominal inflation figures.
As per analysts at Citi Research, the question of when deflation will begin to carry more weight in policy calculations centers on whether the authorities perceive real growth to be under significant threat.
Citi Research report points to the inflation readings from August as the latest evidence of deflationary pressure.
While food prices surged due to supply constraints caused by weather disruptions, contributing to a 3.4% month-over-month increase, this was not enough to offset the overall weakness in demand.
Core inflation, excluding volatile components like food and energy, dropped to its lowest level since 2016, with core goods prices particularly affected.
Home appliances, telecom equipment, and automobiles all saw sharp declines, signaling softness across various sectors. Services prices also contracted, with tourism demand easing significantly compared to previous years.
The Producer Price Index (PPI), which reflects changes in prices received by domestic producers, also registered deeper deflation than expected.
In August, PPI deflation worsened with a 1.8% year-over-year drop, driven largely by falling upstream commodity prices, such as oil and ferrous metals. Downstream industries, like durable goods and automobiles, showed little improvement, with only minor sequential changes.
Despite the surge in food prices, the underlying narrative of broad-based demand weakness remains.
“Looking ahead, online sales events into November may add further downside risks to inflation. Soft oil prices may not bode well for industrial prices either,” the analysts said.
The structural issues within the Chinese economy have been vital in maintaining this deflationary environment.
Citi notes that while food price inflation persisted, it failed to lift the broader inflation metrics due to the persistently weak demand across most sectors.
Consumer sentiment remains fragile, with cautious spending and limited appetite for big-ticket purchases like automobiles and electronics.
The anticipation of lower prices, especially during upcoming online sales events like November's, intensifies concerns.
Combined with global factors such as low commodity prices, China’s domestic economy faces mounting challenges.
The government's current policies appear insufficient to stimulate widespread recovery, as demand remains sluggish and producers continue to face an uphill battle. |
