HONG KONG – China’s economy is facing mounting deflationary pressures as consumer prices experience their sharpest decline in over a year, adding to concerns about weakened demand, sluggish consumption, and overall economic instability in the world’s second-largest economy.
Official data released by the National Bureau of Statistics (NBS) on Sunday revealed that the country’s Consumer Price Index (CPI), a key measure of inflation, dropped by 0.7% in February compared to the same period last year. This unexpected decline reversed the modest 0.5% increase recorded in January and marked the first year-on-year contraction since early 2024. Analysts polled by Reuters had forecast a softer decline, but the steeper-than-expected drop highlights the deepening deflationary cycle that China has struggled to contain.
Deflation poses a serious risk to economic stability by discouraging consumer spending. When prices fall, individuals and businesses often delay purchases in anticipation of even lower prices in the future, further dampening demand and slowing economic activity. In an economy like China’s, where domestic consumption is a key driver of growth, prolonged deflation could undermine recovery efforts and complicate government policy responses.
One of the factors contributing to February’s price drop was the shifting timing of the Lunar New Year holiday, which traditionally stimulates spending on travel, dining, and retail. This year, the holiday fell entirely in January, while in 2023, it extended into February. As a result, last year’s higher base of comparison exaggerated this year’s decline. The NBS noted that without the seasonal distortion, consumer prices would have recorded a marginal 0.1% increase, indicating that underlying demand remains weak even after adjusting for calendar effects.
Core inflation, which excludes volatile food and energy prices, also showed signs of economic fragility, registering a 0.1% decline in February. This marked the first contraction in core CPI since January 2021, reinforcing concerns that weak demand is not limited to seasonal fluctuations but rather reflects a broader downturn in consumer sentiment and purchasing power.
China’s industrial sector has also been struggling under prolonged deflationary pressures. The Producer Price Index (PPI), which measures wholesale and factory-gate prices, dropped by 2.2% in February compared to the previous year. This marked the 29th consecutive month of falling wholesale prices since October 2022, a clear sign that manufacturing activity remains subdued. With factory prices continuing to decline, businesses face shrinking profit margins, which could further dampen investment and employment growth.
In a research note published on Sunday, Goldman Sachs economists emphasized the persistent nature of China’s deflation problem, stating that despite seasonal distortions, both consumer and producer inflation had been “exceptionally low” over the past two years, reflecting fundamental imbalances between supply and demand. The continued weakness in price growth suggests that companies are struggling to pass on higher costs to consumers, a worrying trend that signals economic stagnation.
Beyond price indicators, China’s broader economy faces structural challenges, including sluggish domestic consumption, a wavering labor market, and an ongoing property sector downturn. The real estate industry, once a key pillar of China’s rapid economic expansion, continues to struggle as major developers grapple with liquidity crises and weakened buyer confidence. Housing market instability has compounded deflationary pressures by reducing household wealth and discouraging consumer spending.
China’s external environment has also grown increasingly uncertain. With trade tensions escalating between Beijing and Washington, China’s export sector—long a primary engine of economic growth—is now under strain. Tariffs, export restrictions, and geopolitical tensions have all contributed to a cooling of trade activity, limiting China’s ability to offset weak domestic demand with external sales.
Amid these challenges, China has set an ambitious economic growth target of 5% for 2025, mirroring last year’s goal. At the same time, the government has revised its inflation target downward from 3% to 2%, signaling a clear recognition that deflationary risks remain a significant concern. Yet, despite acknowledging these pressures, Beijing has so far refrained from implementing large-scale stimulus measures, opting instead for targeted interventions aimed at stabilizing key sectors.
During the recent National People’s Congress, policymakers emphasized the importance of boosting consumption and ensuring economic stability. However, no major fiscal stimulus package was announced, raising questions about whether the government’s current approach will be sufficient to reverse the deflationary trend.
At a press conference on Sunday, Wang Xiaoping, China’s minister of human resources and social security, acknowledged the difficult task ahead, stating that stabilizing and expanding employment in 2025 would be “arduous” and subject to significant pressure. With weak hiring and wage growth, consumer confidence is unlikely to rebound quickly, further complicating efforts to stimulate demand.
Meanwhile, officials have outlined steps to support the struggling real estate sector. Ni Hong, minister of housing and urban-rural development, underscored the government’s commitment to restoring confidence in the property market. A portion of this year’s 4.4 trillion yuan ($608 billion) special bond quota allocated to local governments will be used to purchase completed but unsold commercial housing. These properties will then be converted into affordable housing and worker dormitories, a measure aimed at alleviating excess supply while addressing housing affordability concerns.
With deflationary pressures persisting and economic momentum weakening, the coming months will be critical in determining whether China can navigate its way out of the current downturn. While policymakers remain cautious in their approach, growing calls for stronger intervention may push Beijing to take bolder action to prevent a prolonged deflationary slump.
