Price rise may be a concern in India, but in China — the world’s second biggest economy — the spiral of sharp fall in prices has become a challenge for policymakers.
The consumer price index (CPI) fell 0.7 per cent in February in comparison with last year — after January witnessed a 0.5 per cent rise in prices, data from the National Bureau of Statistics (NBS) revealed on Sunday. It was the first contraction in the index since January 2024 and worse than what several economists had been predicting.
“China’s economy still faces deflationary pressure,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, was quoted in a Bloomberg report.
“Domestic demand remains weak,” he added, explaining the reason behind deflation, a situation in which prices of goods and services fall across the economy.
Amid the deflationary trends, the Chinese leadership — during the National People’s Congress last week — vowed greater efforts to boost consumption in the country, where households have remained cautious about spending amid job and income worries.
At the annual parliament session, the leadership announced an ambitious economic growth goal of about 5 per cent for 2025, despite the threat of an intensifying trade war with the US, and also rolled out plans to boost fiscal stimulus and domestic consumption. The government has also set a fiscal deficit target of about $780 billion) — or around 4 per cent of China’s gross domestic product — for the fiscal.
The scale of the stimulus, captured in the deficit arithmetic, can be gauged if compared with the fiscal deficit target of about $200 billion that Union finance minister Nirmala Sitharaman set for the fiscal 2025-26 in her budget proposals tabled last month.
While experts think that the nominal growth target of about 5 per cent is achievable, the worry is over consumer prices that are likely to be near contraction territory for the rest of the year.
Cheaper prices may look good for consumers at first, but it doesn’t necessarily trigger buying as people expect prices to drop even further and defer buying, which affects economic activity, puts pressure on incomes, causing another dip in spending and further price cuts. Deflation also raises the level of “real”, or inflation-adjusted, interest rates, resulting in higher cost of capital, which makes it harder for businesses to invest.
As revival of consumer confidence may take months — and will also depend on factors like whether the property market bottoms out and people start buying — the country needs supply-side reforms to get rid of excess capacity in the economy, Bloomberg mentioned in its report referring to opinions of Citigroup economists.