China’s producer and consumer prices fell in January at the fastest rates in over 14 years, increasing pressure on officials to take further action to boost the country’s flagging economy and reduce the risk of deflation.

Since early last year, the second-biggest economy in the world has struggled with declining prices, which has forced authorities to lower interest rates in order to boost growth while many developed economies were preoccupied with bringing persistently high inflation under control.

The National Bureau of Statistics (NBS) released statistics on Thursday that showed the consumer price index (CPI) decreased 0.8% in January compared to the same month last year, following a 0.3% decline in December. After increasing by 0.1% in the prior month, the CPI increased by 0.3% this month.

According to Reuters polled economists, there would be a 0.4% monthly rise and a 0.5% annual decline.

The significant reduction in food costs was the primary driver of January’s annual CPI decline, which was the largest since September 2009. However, analysts caution that the deflationary tendency in the economy as a whole runs the risk of becoming ingrained in consumer behaviour.

“The CPI data today shows China faces persistent deflationary pressure,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“China needs to take actions quickly and aggressively to avoid the risk of deflationary expectation to be entrenched among consumers.”

Since the COVID limitations ended in late 2022, the Asian behemoth has failed to restore economic pace. Fearful investors have dropped Chinese stocks amid the growing housing crisis and concerns associated with local government debt.

In January, activity in China’s massive manufacturing sector contracted, according to an official survey, indicating that global demand has also remained somewhat subdued.

Shortly after the dismal CPI statistics, Chinese equities fell, but they later rose once again, supported by the recent rapid-fire support measures.

Although the economy increased 5.2% in 2023, exceeding the stated forecast of roughly 5%, investors had not anticipated how shakily the recovery would hold up. Analysts following policy matters anticipate Beijing to stick to its 5% growth objective from the previous year.

Although observers say officials still need to do more to boost demand and confidence, China’s central bank sent a powerful signal of support for the country’s weak economy in late January when it announced the largest reduction in bank reserves in two years.

Core inflation, which excludes erratic food and energy costs, increased by 0.4% from the previous year, compared with a 0.6% increase in December.

For the 12th consecutive year, inflation has fallen short of annual expectations, with the CPI increasing by 0.2% last year compared to the official aim of roughly 3%.

In a note to clients, Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong, stated that “deflation/disinflation is becoming entrenched.”

“The decline is testament to weak domestic consumption. We think a massive stock market sell-off is partially to blame for the decline in sentiment and associated consumption,” Casanova added.

Additionally, the statistics indicated that factory gate deflation was ongoing, which put further pressure on manufacturers to make up for lost revenue.

Following a 2.7% decline the month before, the producer pricing index (PPI) fell 2.5% from a year ago in January, below the 2.6% decline predicted in the Reuters poll.

Factory-gate prices had decreased by 0.2% from the previous month, following a 0.3% decline in December.

Long-term industrial deflation is making it more difficult for smaller Chinese exporters to survive, as their businesses are shrinking and they are forced into constant price wars.

Casanova of Union Bancaire Privee stated, “The People’s Bank of China really ought to deliver stronger policy support.”

“We would prefer to see broad-based interest rate cuts in February, but that remains unlikely given the lack of policy space and issues in policy transmission.”

(Adapted from Investing.com)

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