There was a 0.8% year‑over‑year drop in January in China’s consumer price index (CPI), the main gauge of inflation. This result is 0.5 points below December and marks the fourth straight month of declines, signaling a new phase of deflationary pressure.
The decline represented the largest annual fall for a January reading since September 2009 and extends the longest stretch of monthly decreases since that period, when CPI contracted for three consecutive quarters. The result came in below analysts’ expectations, who had penciled in a 0.5% drop.
Experts attribute the year‑on‑year drop to a higher base effect from January 2023, when Lunar New Year celebrations boosted prices. This year’s Lunar New Year fell in January, amplifying the base effect. Dong Lijuan, a statistician from the Dong Lijuan Institute, notes the holiday effect and highlights a 0.3% monthly CPI increase — the second rise in a row and the largest since August.
Dong also emphasized a 0.3% monthly gain that aligns with the decade’s average and a 0.4% year‑on‑year rise in core inflation, which excludes volatile food and energy prices. The core measure excludes energy due to its volatility while tracking underlying price trends.
New Year… and more
The annual CPI decline is also linked to the timing of the reading, arriving in January as China ended nearly three years of a zero‑covid policy. This transition boosted consumer demand. Food prices fell 5.9% year over year, with pork prices down 17.3%, vegetables down 12.7%, and fruit down 9.1%, together explaining more than 90% of the year‑on‑year CPI contraction. Holidays and cold weather contributed to a 0.4% monthly rise in food prices, while airfares jumped 12.1% and tourism services rose 4.2% due to higher travel demand.
Analysts Julian Evans‑Pritchard and Zichun Huang of Capital Economics agree that the base effect from the Lunar New Year will likely push CPI back into positive territory in the near term, but they also note that food prices remained soft even in January. They caution that structural imbalances between supply and demand suggest core inflation could stay muted relative to pre‑pandemic norms for the foreseeable future. They also point to variables such as changes in automobile prices amid a price war among electricity producers and a real estate overhang that could slow inflation further.
Industrial prices continue to fall
Also released today, the Producer Price Index (PPI), which measures industrial prices, showed a 2.5% year‑over‑year decline in January. The PPI has fallen for sixteen consecutive months, though the pace of the decline eased from December’s 2.7%. The drop was slightly better than analysts’ expectations, who had forecast a 2.6% year‑over‑year decline. On a monthly basis, the PPI eased by 0.2 from December, marking a third straight month of contraction.
Evans‑Pritchard and Huang note that monthly declines have slowed as metal prices rose and infrastructure spending recovered somewhat. They stress that inflation is likely to remain subdued through 2024, with expectations around a 0.5% annual average, though some market observers report firmer readings in certain sectors. The divergence in projections reflects varying assessments of supply capacity, demand dynamics, and policy shifts affecting energy and construction inputs.