^{Photo: Daily Sabah}

China’s deflation concerns deepened in August as consumer prices dropped more than expected, underscoring the persistent weakness in domestic demand and the mounting risks to the country’s economic recovery.

Consumer Prices Show Unexpected Decline

The Consumer Price Index (CPI) fell 0.4% year-on-year in August, according to the National Bureau of Statistics. Economists had anticipated a smaller decline of 0.2%. The sharper-than-expected drop highlights the fragile state of household spending despite recent policy support.

Core CPI — which excludes volatile food and energy costs — rose 0.9% compared to a year earlier, the fastest pace since February 2024. Gains were most evident in household appliances, which climbed 4.6%, and clothing, which rose 1.9%, suggesting targeted areas of consumer demand remain resilient.

Producer Prices Stay in Deflation Territory

Meanwhile, the Producer Price Index (PPI) fell 2.9% year-on-year, marking the 12th consecutive month of contraction. On a month-to-month basis, producer prices were flat. Economists note that while the decline is moderating compared to earlier months, weak global demand and excess industrial capacity continue to weigh heavily on Chinese manufacturers.

Tianchen Xu, senior economist at the Economist Intelligence Unit, cautioned that a meaningful turnaround is still distant, as Beijing has resisted curbing industrial overcapacity and faces weaker international demand for raw materials and manufactured goods.

Food Prices Lead the Drop

Food costs were the primary drag on headline CPI. Prices fell 4.3% in August, deepening from a 2.7% decline in July. Pork — a key staple in Chinese households — along with fresh vegetables and fruits, saw sharp price drops.

Deflation in consumer durables also worsened, with prices falling 3.7% in August, compared to 3.5% in July, according to Capital Economics. This trend, economists argue, is a clearer signal of weak underlying demand across Chinese households.

Policy Response and Economic Strains

Policymakers attributed the negative CPI reading partly to last year’s high comparison base and partly to weak food inflation. At the same time, Beijing credited regulatory efforts for narrowing the extent of price declines in producer goods, pointing to new measures aimed at curbing excessive price competition.

Services inflation provided little relief, edging up just 0.6% year-on-year, reflecting tepid consumer activity in travel, dining, and leisure.

Several local governments have also suspended their popular trade-in subsidy programs — which supported purchases of cars, home appliances, and smartphones — after funds allocated for the programs were quickly exhausted. This move has further dampened expectations of a near-term boost in household consumption.

Rising Pressure for Stimulus

Economists are now urging Beijing to deliver stronger fiscal measures to counter mounting deflationary risks. China has set its 2025 inflation target at around 2%, but current trends suggest achieving that goal may be challenging without significant government intervention.

Adding to the pressure, China’s exports slowed sharply in August, growing only 4.4%, the weakest pace in six months. Economists warn that trade headwinds will persist, particularly as the U.S. steps up measures to prevent rerouting of goods through third countries to bypass tariffs.

Outlook for China’s Economy

While the modest rebound in core inflation shows that targeted stimulus may be having some effect, most analysts agree the improvement reflects temporary factors rather than a genuine rebalancing of supply and demand. Unless Beijing delivers a more aggressive policy response — including fiscal support to households and businesses — deflationary risks are likely to persist into 2025, clouding China’s growth outlook.