China's Consumer Inflation Rate Sees First Increase in Six Months Amid Holiday Surge

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China's consumer inflation has become positive after six months, thanks to the Lunar New Year holiday. During this time, a surge in spending has led to an increase in prices.

The government data revealed that the Consumer Price Index (CPI) went up by 0.7% in February compared to the same time last year. This exceeded the predicted 0.3% increase from a Reuters survey.

This marks the first uptick in the inflation rate since August 2023. In January, the index experienced its sharpest decline in 15 years.

Analysts mentioned that the increase compared to the previous year was influenced by the timing of the Lunar New Year holiday. This holiday shifts between January and February annually, following the cycles of the moon.

Zhiwei Zhang, who serves as the president and chief economist for Pinpoint Asset Management, expressed caution in declaring an end to deflation in China. He pointed out that domestic demand remains relatively low and needs improvement.

China struggled with low prices throughout last year, mainly due to a property market downturn, a stock market crash, and weak consumer confidence. The People's Bank of China attempted to stimulate bank lending and push inflation back up to 3% by cutting interest rates multiple times. Despite these efforts, the Consumer Price Index (CPI) only rose to 0.2% in 2023, significantly below the target set by the government.

Deflation poses a significant threat to the economy as both consumers and businesses may delay spending or investments in anticipation of further price drops. This behavior can lead to a harmful cycle of reduced spending, more business closures, and increased unemployment rates.

Services prices showed strong performance in February, especially in the tourism and entertainment sectors. The sub-index for tourism increased by 23.1% compared to the previous year, marking the highest growth among all categories.

However, it is anticipated that the boost in prices due to the holiday season will likely diminish in the upcoming month.

"We anticipate that CPI inflation will drop to 0.4% year-on-year in March," stated Nomura analysts in a research report on Monday. They also mentioned that food prices have been decreasing since the end of the celebrations.

Shoppers browse for groceries at a supermarket in Nanjing, Jiangsu province.

Shoppers browse for groceries at a supermarket in Nanjing, Jiangsu province.

Costfoto/NurPhoto/Getty Images

Producer deflation continued to worsen last month, with the Producer Price Index showing a 2.7% decrease compared to the previous year. This marked the 17th straight month of decline, highlighting ongoing deflationary pressures in the industries supplying raw materials and suggesting weak demand for goods.

Beijing is still facing challenges in boosting growth and tackling deflation this year. Premier Li Qiang announced last Tuesday that the government has set a growth target of around 5% and an inflation target of 3% for this year.

However, Premier Li also emphasized the need to "transform" the growth model and address debt risks in the economy. This could potentially lead to local governments being less aggressive in their investments in infrastructure projects.

Last Wednesday, Pan Gongsheng, the governor of the PBOC, mentioned to reporters that the central bank plans to continue supporting monetary easing. This could involve further rate cuts to help strengthen the economy.

On the same day, Zheng Shanjie, the head of the country's economic planner, shared that the government will introduce a new program to boost consumer spending. This initiative will focus on encouraging large-scale equipment upgrades and replacing old durable goods like cars and home appliances with new ones.

Analysts emphasized that the key to driving growth and increasing prices will depend on how Beijing carries out its policies to encourage demand and enhance confidence.

Citi analysts highlighted the importance of the demand-side initiatives following the conclusion of the National People's Congress. They particularly noted the significance of the trade-in program for durable goods.

Editor's P/S:

China's recent positive inflation data brings a glimmer of hope after months of deflationary concerns. Driven by the surge in spending during the Lunar New Year holiday, consumer prices have finally shown an uptick. However, economists caution that this improvement may be temporary, as underlying domestic demand remains weak. The government's ambitious growth and inflation targets for 2023 face challenges, particularly in transforming the growth model and addressing debt risks.

To address these challenges, Beijing is implementing various measures, including monetary easing and consumer spending incentives. The success of these policies will largely depend on their effectiveness in stimulating demand and boosting confidence. The trade-in program for durable goods, in particular, has been identified as a key driver for growth. By encouraging consumers to upgrade their equipment and replace old goods, the government aims to create a positive cycle of increased spending and investment. The outcome of these efforts will shape China's economic trajectory in the coming months and its impact on the global economy.