Consumer prices across China are falling at the fastest pace in 15 years, as its economy struggles with weak demand. The consumer price index fell by 0.8% year-on-year in January, data released this morning showed. It’s the fourth straight month of declines, and the biggest contraction since 2009, after the financial crisis. The inflation rate was dragged down by falling food prices, which dropped by 5.9% year-on-year in January. Pork prices dropped by 17%, and were a major drag on inflation, while fresh vegetables were 12.7% cheaper than a year ago and fruit cost 9.1% less. China’s factories continued to cut their prices last month, too. The producer price index (PPI) slid 2.5% from a year earlier in January after a 2.7% fall the previous month. China’s consumer prices dropped into deflationary territory last summer, and prices have been flattish since. Its economy has struggled as the bounceback after the lifting of Covid-19 restrictions falters, and as its indebted real estate sector contracts. The drop in annual inflation puts more pressure on Beijing policymakers to take fresh steps to stimulate the economy. China’s stock markets have rallied a little today. Kyle Rodda, senior financial market analyst at capital.com, says the markets have “ostensibly reacted favourably” to disappointing Chinese price data. "Perhaps markets see the terribly low number as a potential catalyst for more muscular monetary or fiscal stimulus from the central government, which, up until this point, has been moderate in applying countercyclical policy." China’s January’s -0.8% annual inflation reading could mark the low point in the current cycle, according to Lynn Song, ING’s chief economist for Greater China. Song argues China is not trapped in a “deflationary spiral”, and predicts pork prices could pick up due to demand in this month’s Lunar new year holidays. "Sequential data paints a more upbeat picture. In [month-on-month] terms, headline CPI rose 0.3%, food CPI rose 0.4%, and non-food CPI rose 0.2%. While a far cry from the above-target inflation levels seen in many other economies, these numbers do not imply China is stuck in a deflationary spiral." Song sees "a high likelihood that January’s data could mark the low point for YoY inflation in the current cycle". Also coming up • 9.30am GMT: Latest weekly data on UK economic and business activity • 1.30pm GMT: US weekly jobless claims figures • 3pm GMT: BoE policymaker Catherine Mann to speak on inflation.
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