China’s Inflation Rate Slows in April as Demand Remains Weak

China’s consumer price index rose 0.1% in April year-on-year, marking its slowest growth since early 2021. However, prices declined by 0.1% month-on-month. Economists surveyed by Reuters had predicted consumer prices would rise by 0.4% from a year ago and remain unchanged from the previous month. April’s reading follows China’s inflation rate easing to 0.7% in March after reaching a recent peak of 2.8% in September. Core inflation, which excludes food and energy, remained steady at 0.7% year-on-year and 0.1% month-on-month. China’s producer price index, which measures prices paid by wholesalers, fell 3.6%. Economists surveyed by Reuters had expected to see a decline of 3.2% year-on-year, after dropping 2.5% in the previous month.

Factors Impacting China’s Inflation Rate

Compared to last year, service prices rose 1% in April, according to the National Bureau of Statistics. This rise was attributed to domestic tourism recovery, especially in transportation and leisure activities during the Golden Week holiday. However, China’s low inflation rate is likely driven by insufficient demand, as households remain cautious about large-ticket items such as white goods and autos. Weakness in the labor market and a slower recovery in the property market also continue to weigh on consumer sentiment. While the service-driven inflation readings show there is a lower chance of inflation spilling over to the global economy, market watchers have begun to question whether the world’s second-largest economy is heading into deflation.

Expectations for Future Stimulus

Aletheia Capital’s China strategist, Vincent Chan, has stated that China’s consumer recovery is still in its early stages, and there is an expectation for the Chinese government to provide more stimulus to boost the economy’s weak demand. He believes that there is more room for stronger fiscal stimulus, and that the market wants to see this. BofA’s chief China economist, Helen Qiao, writes that inflation has largely moderated in China following its reopening, and that it almost appears that the People’s Bank of China would have ranked high on the scorecard for inflation control, as China has managed to keep its consumer price index inflation rate at an average of 1.8%, close to the lowest three-year average reading since 2003.