China Deflation Alarms Raised by Falling Prices for Food and Cars

Decline in Consumer Prices

In January, consumer prices in China experienced the largest decline since the global financial crisis in 2009. This decline indicates that weak spending and an oversupply of goods from factories and farms are leading businesses to offer discounts.

The decline was primarily seen in food and electric cars. Additionally, wholesale prices charged by factories and other producers also fell last month, and have been consistently lower than the previous year's levels since October 2022.

A decline in overall prices, known as deflation, can be concerning for the economy. Falling prices make it difficult for households and companies to meet their monthly payments for mortgages, corporate loans, and other debts.

Economic Challenges for the Chinese Government

The deflation data, combined with a struggling stock market and a deteriorating property market, present significant challenges for the Chinese government's command and control approach to the economy. Eswar Prasad, a professor of trade and economics at Cornell University, emphasizes the severity of the situation.

China's stock markets have experienced sharp declines this year. However, the losses have been partially reduced this week. On Wednesday, it was announced that Yi Huiman, the official responsible for oversight of the stock markets, has been replaced by Wu Qing, a longtime regulator.

Although the decline in prices poses challenges for the economy, it does have a positive aspect for China. Lower prices make Chinese goods even more competitive in international markets. Manufacturers, ranging from electric cars to solar panels, are increasing their exports to distant markets to offset the domestic slowdown in consumer spending.

Factors Influencing Consumer Prices

In January, consumer prices in China dropped by 0.8 percent compared to the previous year. The major driver of this decline was falling food prices, with pork prices experiencing a significant plunge of 17.3 percent.

It is important to note that pork prices can be volatile, especially during the Lunar New Year, when demand typically increases due to family celebrations. In 2023, the holiday fell in late January, leading to higher pork prices for the month. However, this year the holiday is nearly three weeks later, which means prices could potentially rise in February.

Excluding food, consumer prices increased by 0.4 percent. While prices for electric cars decreased, there were slight increases in prices for clothing, health care, and tourism.

About the Author

Keith Bradsher is the Beijing bureau chief for The Times. With previous experience as a bureau chief in Shanghai, Hong Kong, and Detroit, as well as a Washington correspondent, Bradsher has extensive knowledge and expertise in reporting on Chinese economic developments. He has also remained in mainland China throughout the COVID-19 pandemic.