Chart of the Week: Continued weak price growth in China

Chinese annual consumer price growth was negative for the fourth month in a row, declining by 0.1% in May. Core inflation, which excludes food and energy items, was in positive territory, with prices 0.6% higher than in May of last year. Excluding periodic spikes driven by food prices, Chinese headline price growth rarely reached the old inflation target of 3% and seems set to continue to undershoot the new target of 2% adopted at the 2025 National People’s Congress.

Anaemic domestic demand is a driving factor behind the weak price developments. Chinese consumption as a share of GDP has long been low relative to other countries, as the export and investment-led growth model of the past twenty years has engendered policies that prioritise saving over consumption and encouraged a strong precautionary savings motive in households. Demand was further depressed as house prices started to fall in 2021, following the default of large real estate investment groups on the back of tighter regulation of the property development sector. The housing downturn continues to weigh on consumer confidence and demand for big-ticket consumer durable items. With house price deflation seemingly having bottomed out there may be slight improvements to confidence going forward. Furthermore, surveys indicate an increase in the per cent of urban respondents planning to purchase large-ticket items. However, this is unlikely to be sufficient in increasing demand to a degree where prices meaningfully rise, and ongoing trade tensions with the US may result in other drags on price growth as producer’s attempt to relieve some of their overcapacity issues by cutting prices at home.

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