China’s Deflationary Trends

China’s Consumer Price Index (CPI) experienced a year-on-year decline of 0.3 per cent in July, marking the first such decrease since early 2021, although slightly higher than predicted. The fall, according to analysts, is attributed to a combination of factors, including a high base from the preceding year and short-term market fluctuations, particularly the 1.7 per cent decline in food prices. Simultaneously, monthly data revealed a 0.2 per cent increase in the CPI, with non-food items rising 0.5 per cent and services by 0.8 per cent, indicating signs of recovering domestic demand.

Moreover, the narrowing decline in the Producer Price Index (PPI), which dropped 4.4 per cent year-on-year in July from 5.4 per cent in June, suggests the potential for stabilisation in factory-gate prices.

Although both CPI and PPI showed deflationary trends in July, experts believe China's situation might be improving, casting doubt on their continued deflation by year-end. Despite the short-term challenges reflected in the data, analysts remain optimistic about the future. They anticipate that the dip in consumer prices is likely a temporary phase, projecting a return to a more balanced range due to sustained economic recovery and the support of comprehensive policies.