China’s consumer prices declined for the fourth consecutive month in May, despite government efforts to stimulate domestic consumption.

The consumer price index (CPI) fell by 0.1% compared to the previous year, according to data from the National Bureau of Statistics.

Since February, the CPI has shown year-on-year declines, including a 0.7% drop in that month and 0.1% decreases in March and April.

However, core inflation, which excludes volatile food and energy prices, increased by 0.6% in May, marking the highest rise since January 2025.

Producer prices also continued a decline, with the producer price index (PPI) dropping by 3.3% year-on-year in May, exceeding analysts’ expectations of a 3.2% decline.

Analysts attribute the ongoing deflation to weak consumer demand and intense price competition in the automotive sector.

.source-ref{font-size:0.85em;color:#666;display:block;margin-top:1em;}a.ask-tia-citation-link:hover{color:#11628d !important;background:#e9f6f5 !important;border-color:#11628d !important;text-decoration:none !important;}@media only screen and (min-width:768px){a.ask-tia-citation-link{font-size:11px !important;}}

🔗 Source: CNBC

🧠 Food for thought

1️⃣ China’s deflation follows historical patterns despite different economic circumstances

China’s current deflationary episode shows parallels to its 1998-2002 period, when the government’s initially slow response to loosen monetary policy contributed to a prolonged economic downturn 1.

The persistent producer price deflation, ongoing since October 2022, mirrors a similar pattern observed in the early 2010s when the Producer Price Index remained negative for 39 consecutive months starting February 2012 1.

Historical evidence suggests that early and aggressive monetary easing is more effective than delayed responses, as monetary policy typically loses effectiveness in established deflationary environments 1.

Previous deflation was successfully addressed through a combination of overcapacity reduction (via firm closures and mergers) and expansionary fiscal policies that boosted effective demand—measures that might be relevant again today 1.

Unlike the previous recovery, which was supported by housing market reforms that drove real estate investment growth above 20% annually by 2000, China now faces the challenge of finding new growth engines as property markets continue to decline 1.

2️⃣ Monetary policy alone proves insufficient without coordinated fiscal support

Current interest rate cuts and reserve requirement ratio reductions, while significant, echo Japan’s experience during its “lost decades,” suggesting monetary policy alone may be inadequate to revive growth 2.

China’s household sector is experiencing a balance sheet slowdown with significant wealth effects from declining property values (down nearly 30% since 2021) and stock market losses, directly impacting consumer confidence and spending 3.

The sharp rise in household savings—bank deposits have increased to $40.9 trillion—indicates Chinese consumers’ reluctance to spend despite monetary easing measures, pointing to deeper structural issues beyond what interest rate cuts can address 3.

Analysts project that without more aggressive fiscal interventions to stimulate demand, China’s GDP growth could fall significantly below targets, potentially leading to a prolonged period of economic stagnation 2.

Economic experts emphasize that coordinated monetary and fiscal policies are essential to address China’s current challenges, with fiscal measures like infrastructure investments and social programs needed to complement the PBOC’s monetary easing 3.

3️⃣ Auto sector price wars reflect broader overcapacity challenges

The auto industry price wars represent a recurring pattern in China’s economy, where industrial overcapacity leads to aggressive price competition that contributes to deflationary pressure 1.

This pattern of overcapacity driving deflation has historical precedent—during previous deflationary episodes, loss-making enterprises producing at unsustainably low costs prolonged deflationary conditions across multiple sectors 1.

China’s previous success in combating deflation came partially through addressing overcapacity via firm consolidations and closures, suggesting that today’s auto sector may require similar structural reforms beyond just monetary stimulus 1.

The auto sector’s price competition reflects a broader challenge in China’s industrial policy, where production capacity often outpaces domestic consumption capabilities, creating persistent downward pressure on prices 4.

These industry-specific deflationary forces highlight why China needs to “rely on domestic demand to fight deflation” as noted in the article, emphasizing the importance of boosting consumer purchasing power rather than merely expanding production capacity 1.

……