China’s Consumer Price Index drops 0.8 percent in January amid export pressures

Consumer and producer price challenges pose threats to growth and employment
China’s Consumer Price Index drops 0.8 percent in January amid export pressures
Compared to December, the CPI actually rose by 0.3 percent in January, up for the second month in a row

China is grappling with significant challenges as its Consumer Price Index (CPI) dropped 0.8 percent in January compared to 2023. Both consumer and producer prices plummeted, exacerbating concerns about deflation and its impact on China’s growth and employment. The nation’s economy, already facing headwinds from a property crisis and debt issues, now contends with prolonged factory deflation and intense competition in export markets.

Consumer price deflation

The latest data from the National Bureau of Statistics (NBS) reveals a concerning trend in China’s consumer prices, with the CPI witnessing its most substantial drop since the global financial crisis of 2009. In January, the CPI plunged by 0.8 percent compared to the previous year, marking the fourth consecutive month of decline. Compared to December, the CPI actually rose by 0.3 percent in January, up for the second month in a row.

NBS attributed this sharp fall partly to a seasonal issue, notably the timing of the Lunar New Year, which distorted the base for comparison. However, weak consumer demand and significant decreases in food prices contributed to the downward pressure on prices in China.

Producer price deflation

In parallel, China faces persistent deflation in producer prices, which have fallen for 15 consecutive months. This prolonged decline is narrowing profit margins for industrial firms, posing risks to industrial output and employment. Industrial profits also experienced a 2.3 percent decrease last year. Meanwhile, manufacturing activity is contracting for the fourth consecutive month in January. Therefore, the challenges in the producer sector are profound. Moreover, export orders have shrunk for the tenth month, reflecting the intense pressure on Chinese exporters in global markets.

Economic outlook

Analysts emphasize the urgency for China’s policymakers to address the decrease in prices. They view fixing deflation as a higher priority than achieving growth targets. While China’s central bank injects liquidity into the financial system to stimulate growth, smaller firms, unable to compete with larger rivals, are reluctant to borrow. Therefore, this highlights inefficiencies in monetary policy transmission. The investment by private companies which is essential for urban job creation declined by 0.4 percent last year. In turn, this exacerbates concerns about employment stability.

Read: OECD raises global growth outlook to 2.9 percent in 2024

Challenges for small exporters

The challenges also extend to China’s smaller exporters, who face relentless challenges due to decreasing prices and intense competition in export markets. Despite efforts to stimulate growth through financial incentives and infrastructure spending, the pressure to cut jobs remains intense for many factory owners. Hence, the reluctance to downsize reflects a complex web of economic and social factors. Business owners are navigating economic viability and their sense of responsibility towards employees.

As China navigates through economic challenges, policymakers face the critical task of balancing growth objectives with structural reforms. The ability to stimulate domestic consumption, support small and medium-sized enterprises, and foster innovation will be pivotal in safeguarding economic resilience.

For more news on the economy, click here.

The stories on our website are intended for informational purposes only. Those with finance, investment, tax or legal content are not to be taken as financial advice or recommendation. Refer to our full disclaimer policy here.