China’s Economy Under Pressure: Consumer Prices Decline Amid Deflationary Concerns

New data from China's National Bureau of Statistics reveals a complex economic picture, marked by persistent deflationary pressures in consumer spending but tentative signs of stabilization in the industrial sector. The consumer price index (CPI) fell at its fastest rate in six months, dropping by 0.4% in August from the prior year. This decline was more significant than the 0.2% drop economists had anticipated. 

This consumer deflation is driven by sluggish domestic demand, a protracted downturn in the property market, and weakness in key sectors. Food prices saw a notable drop of 4.3% in August. The data highlights the struggle to spur spending despite recent government efforts, including interest subsidies for consumers and businesses in certain service industries.

However, there is some positive news. The producer price index is contracting by 2.9% year-on-year and this was an improvement from the 3.6% decline in July and was in line with economists' projections. This moderation in factory deflation suggests that Beijing's efforts to curb excessive competition and price wars in key industrial sectors may be yielding results.

Even with the slight easing in PPI deflation, economists like Tianchen Xu of the Economist Intelligence Unit noted that a full recovery for China’s industrial sector is still some way off. A long-standing price war, particularly in the auto industry, has hurt manufacturers' profits for nearly three years, compounded by weak global demand and trade uncertainties. The country’s export growth slowed to a six-month low in August, underscoring continued external pressures.

Despite the broader economic challenges, core inflation—which excludes volatile food and energy prices—rose by 0.9% in August, its highest level in over two years. This suggests that some demand stimulus policies are having an effect, even if the overall economy remains far from its 2025 inflation target of about 2%.