^{Photo: South China Morning Post}

China’s economy is showing deeper signs of strain as consumer prices fell more than expected in August, underscoring persistent deflationary pressures that are raising alarm bells for policymakers in Beijing. The latest data from the National Bureau of Statistics revealed that the consumer price index (CPI) dropped 0.4% year-on-year, double the 0.2% decline forecast by economists. This marked one of the sharpest falls in recent months, highlighting the fragile state of domestic demand.

Core inflation and price shifts

While headline inflation slipped into negative territory, core CPI—which strips out volatile food and energy costs—rose 0.9% compared to a year earlier, the strongest gain since February 2024. Notable increases were seen in household appliances, up 4.6%, and clothing, which climbed 1.9%. Services inflation also edged up modestly to 0.6% year-on-year, suggesting limited momentum in consumer spending.

On the wholesale front, the producer price index (PPI) contracted 2.9% in August from a year earlier, aligning with economists’ projections. Although the pace of decline has slowed, PPI remains stuck in deflationary territory for the third consecutive year, weighed down by weak global demand and persistent overcapacity in China’s industrial sector.

Food and consumer durables drag prices lower

The most striking declines came from food categories, which fell 4.3% in August compared to 2.7% in July. Pork, fresh vegetables, and fruits saw particularly steep price cuts. Consumer durables—often viewed as a clearer indicator of long-term demand—also posted deeper declines of 3.7%, worsening from July’s 3.5%. These figures reveal that Chinese households are holding back on discretionary spending, even as prices drop.

Beijing’s policy response and challenges

Chinese authorities attributed the CPI downturn partly to a high base from last year, alongside weakening food prices. Officials also noted that tighter regulation of excessive price competition has narrowed the PPI decline. Still, economists warn that the recent uptick in core inflation reflects temporary factors, rather than a genuine rebalancing of supply and demand.

Beijing has set an annual inflation target of around 2% for 2025, yet the latest figures show the economy falling far short of that goal. Local governments have already scaled back consumer trade-in subsidy programs—designed to boost purchases of cars, smartphones, and appliances—after funds were quickly exhausted.

Growing pressure on exports

The inflation challenges are compounded by faltering external demand. China’s exports grew just 4.4% in August, the slowest pace in six months, according to customs data. Economists warn that outbound shipments could face further headwinds as the United States intensifies efforts to crack down on goods rerouted through third countries. With exports historically serving as a key growth engine, the slowdown adds further urgency for Beijing to stimulate domestic consumption.

Outlook for China’s economy

While policymakers have intensified efforts to stabilize prices and prevent excessive discounting, economists argue that fiscal support and broader reforms will be essential to restore growth momentum. Deflationary pressures, particularly in PPI, suggest that recovery across industries remains elusive.

For now, China’s path to hitting its 2025 inflation target appears uncertain. Without stronger policy measures to boost household demand and revive global competitiveness, the risk of prolonged deflation could undermine both corporate profitability and long-term economic stability.