Chinese prices are falling again, reviving fears of deflation

Prices in China are falling again after a two-month delay, with households and businesses reluctant to spend even as state banks pump money into building more factories.

The price drop could put China on the brink of a damaging economic situation called deflation, in which companies and workers find themselves receiving less money for their goods or their work, while their debts remain as high as ever.

In the United States, by contrast, inflation has fallen significantly, although consumer prices are still higher than before the pandemic. Europe still struggles with inflation.

Consumer prices in China fell by 0.2 percent in October compared to a year earlier, the National Bureau of Statistics said on Thursday. Falling food prices played a major role, especially a 30 percent drop in pork prices as Chinese farmers started raising more pigs.

Changes in food prices can be abrupt and do not necessarily lead to deflation or inflation, which are changes in the overall price level of an economy. Excluding food prices and energy prices – gasoline became slightly more expensive in China last month – consumer prices were 0.6 percent higher in October than a year earlier, the statistics agency said.

Gita Gopinath, first deputy managing director of the International Monetary Fund, said at a news conference in Beijing on Tuesday that she thought China could avoid deflation. Weak food and energy prices have brought down inflation broadly but may not last, she said.

“We do not expect a general deflation trend in China; we expect inflation to be completely positive in a year,” she said.

But falling food prices don’t explain a much broader decline in the wholesale prices charged by factories and other producers. China’s producer price index fell 2.6 percent in October compared to the same month last year; on a year-over-year basis, it has now fallen for thirteen months in a row.

Producer prices fell in October from a year earlier for goods ranging from steel and coal to electric cars, although there are indications of a stabilization in electric car prices this fall.

Stock prices rose in initial trading in Shanghai and Shenzhen on Thursday, even as the fall in consumer prices was slightly deeper than the 0.1 percent decline economists had expected. Consumer prices were flat in September compared to a year earlier, with an increase of 0.1 percent in August and a decrease of 0.3 percent in July.

Economic weakness was recently visible on a weekday in Weifang, a city in east-central China’s Shandong province. A street long street lined with shops selling building materials such as paint, plaster and carpeting was completely empty shortly before lunchtime.

Liu Prices of apartments in the towers overlooking the street have fallen by 30 to 40 percent in recent years, he said, yet there are still no buyers and therefore no one spending money on kitchen interiors.

“Apartments can no longer be sold in China,” Mr. Liu said.

Falling prices in China reflect weak demand and oversupply of a range of goods. Apartments are the most important asset of Chinese families, accounting for three-fifths to four-fifths of household wealth. The decline in apartment prices has made many people reluctant to spend money.

Prices of existing homes in 100 cities across China have fallen by an average of almost 18 percent since August 2021, according to the Beike Research Institute, a research firm in Tianjin.

China’s strict pandemic restrictions also appear to have had a lasting effect on consumers’ and businesses’ willingness to spend, even though China abruptly abandoned these measures 11 months ago. Consumer confidence plummeted nationwide during the two-month Covid lockdown in Shanghai in the spring of last year, falling much more sharply than during the global financial crisis of 2008 and 2009.

When consumer confidence surveys showed no recovery last spring, the National Bureau of Statistics temporarily stopped releasing the data. But this has now resumed, and the data shows that after a small rebound in the first three months of this year, after Covid control measures were lifted, consumer confidence has fallen to levels almost as low as at the end of the lockdown in Shanghai.

Li You research contributed.