Deflation alarms in China raised by falling food and car prices

Consumer prices in China fell the most last month since the 2009 global financial crisis, the latest sign that weak spending and a glut of output from factories and farms are forcing companies to offer discounts.

The decline in consumer prices was largely limited to food and electric cars. But wholesale prices charged by factories and other producers also fell last month, and have fallen every month since October 2022 from their levels a year earlier.

A broad decline in the general price level, a phenomenon known as deflation, could be very difficult for the economy. Falling prices make it difficult for households and businesses to maintain monthly payments on mortgages, business loans and other debts.

“The deflation data adds to a range of other economic indicators that, in addition to a struggling stock market and a collapsing real estate market, pose an extraordinary challenge to the Chinese government's command and control approach,” said Eswar Prasad, professor of commerce. and economics from Cornell University.

Chinese stock markets have fallen sharply this year, although they trimmed their losses this week. China said on Wednesday that the official most directly responsible for overseeing stock markets, Yi Huiman, has been replaced as leader of the China Securities Regulatory Commission. Mr Yi, 59, was replaced by Wu Qing, a longtime supervisor.

The price drop has one positive side for China: it makes Chinese goods even more competitive in overseas markets. As many Chinese families have become increasingly wary about their spending, manufacturers of everything from electric cars to solar panels are increasing their exports to far-flung markets.

Consumer prices fell by 0.8 percent in January compared to a year earlier, a much larger decline than expected. That decline was caused by falling food prices, including a 17.3 percent drop in the price of pork.

The price of pork can be volatile, especially around Lunar New Year when family celebrations increase demand. In 2023, the holiday fell in late January, likely pushing pork prices higher that month. This year it is almost three weeks later, meaning prices could rise in February.

Excluding food, consumer prices rose by 0.4 percent. Falling prices for electric cars were offset by slowly rising prices for clothing, healthcare and tourism.