Inflation to consumer in China registers greater drop in 13 months and presses government to reinforce stimuli

China’s Consumer Price Index (IPC) dropped 0.7% in February compared to the same period of the previous year, according to data released on Sunday, 10, by the National Statistics Office (NBS). This is the highest retraction recorded in 13 months and the first annual contraction of the indicator since January 2024.

The result was below the estimates of analysts consulted by Reuters agency, which provided for 0.5%. In January, the index had shown a 0.5% increase in annual terms.

IPC’s slowdown occurs in a weakened internal demand context, with consumers showing caution to uncertainties related to the labor and income market. Seasonal demand has also lost strength, impacting inflation data.

The persistence of deflationary pressures has been observed in other indicators. Producer prices, who have been retraction for months, continue in a negative trajectory, reflecting the difficulty of the Chinese economy in sustaining consistent levels of industrial activity.

The Chinese government announced last week that it will adopt additional measures to stimulate consumption, given the internal scenario and the intensification of the commercial dispute with the United States. Still, analysts evaluate that the country’s economy should continue to face structural obstacles over the coming months.

Beijing’s economic growth target for 2025 was maintained by about 5%, similar to that projected for 2024. The annual inflation target was revised to approximately 2%, compared to 3%in the previous year.

Experts note that current numbers indicate an additional challenge for the country’s economic authorities, who seek to promote stability and recovery through fiscal and monetary policies. The maintenance of inflation below the goal, combined with low consumer confidence, reinforces the diagnosis that there is a need for additional adjustments in the strategy to encourage domestic activity.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said “China’s economy still faces deflationary pressure.” For him, despite advances in specific sectors, such as technological, domestic demand continues at reduced level.

Zhang added that, given the adverse external scenario, with exports subject to risks arising from the trade war, fiscal policy must assume more active role. The economist also pointed out that the country’s real estate sector remains fragile, with no clear signs of recovery.

The deflation trajectory observed in price indicators reinforces the concern of economic authorities with the capacity to support recovery. The government has indicated that it intends to expand consumption support programs, but faces limitations to reverse the distrust of consumers and companies.

Deflating pressures have been accompanied by deceleration in different segments of the economy. Data from the retailer, industry and real estate market point to a pace of activity below expectations, which makes it difficult to achieve the established growth goals.

NBS did not detailed the specific factors that influenced the contraction of the index in February, but analysts point out that the end of the post-purchase Lunar post-purchased impetus and the maintenance of conservative consumer patterns negatively influenced results.

With inflation below projections, expectations are increased by the possibility of new cuts in interest rates and consumption stimuli. However, the space for more aggressive measures remains restricted, considering the current level of indebtedness in some sectors of the economy.

Price deceleration can also impact the revenue and expectations of revenue from local governments, many of which face tax challenges. This raises the importance of coordinated initiatives between the central government and regional administrations.

Trade war with the United States continues as a factor of uncertainty for Chinese foreign trade. With exports subject to barriers and restructuring in global supply chains, the government evaluates ways to mitigate negative impacts and expand domestic market weight on growth composition.

The revision of the lower inflation target reflects the perception that prices should not react significantly in the short term, even with stimuli already underway. Complementary measures are expected to be implemented throughout the year.

The government has not yet released details about the upcoming consumer incentive packages, but sector sources indicate that new credit programs, subsidies and support to the housing sector are under evaluation.

Consumer deflation and the persistence of producer prices fall into the world’s second largest economy in the face of a challenging scenario, requiring coordinated responses to avoid prolongation of demand in demand.

With information from Reuters