HONG KONG – China is facing escalating deflationary pressures as consumer prices record their steepest decline in over a year, raising alarm about weakening domestic demand and the broader economic outlook of the world’s second-largest economy. The latest data, released by the National Bureau of Statistics (NBS) on Sunday, indicates that the country’s economic recovery remains fragile, despite government efforts to stabilize growth.
The Consumer Price Index (CPI), a key indicator of inflation, fell by 0.7% in February compared to the previous year. This unexpected drop marks a reversal from January’s 0.5% increase and represents the sharpest contraction since early 2024. Analysts polled by Reuters had projected a milder decline, but the deeper-than-anticipated fall underscores the persistent deflationary trend that has plagued China’s economy over the past two years.
Deflation is particularly problematic because it discourages consumer spending, as individuals delay purchases in anticipation of further price declines. This hesitancy reduces overall demand, which in turn suppresses business revenues, slows production, and limits job creation. Given that consumer spending is a crucial driver of China’s economic activity, the ongoing decline in prices raises concerns about the sustainability of growth in the coming months.
One factor contributing to February’s deflationary drop was the timing of the Lunar New Year, which traditionally boosts consumption. Unlike in 2023, when the holiday extended into February, this year’s celebrations fell entirely in January. This shift in the holiday period led to a higher base of comparison, making February’s economic activity appear weaker. The NBS stated that if adjusted for this seasonal effect, the CPI would have increased slightly by 0.1%, suggesting that while the decline was exacerbated by calendar distortions, underlying demand remains weak.
Adding to the concerns, China’s core inflation—which excludes volatile food and energy prices—also fell by 0.1% in February. This marks the first contraction in core prices since January 2021 and signals that weak demand is not confined to specific categories but is instead affecting a broad range of goods and services. Core CPI is often seen as a more accurate measure of long-term inflationary trends, and its decline suggests that deflationary risks are becoming more entrenched.
The industrial sector has not been spared from the deflationary downturn. The Producer Price Index (PPI), which tracks factory-gate prices, fell by 2.2% in February compared to the same period last year. This marks the 29th consecutive month of declining wholesale prices since October 2022, underscoring the prolonged struggles faced by manufacturers. With factory prices continuing to fall, businesses are facing shrinking profit margins, leading to reduced investments and production cutbacks. These challenges could further impact employment, exacerbating the economic slowdown.
Economists from Goldman Sachs noted in a Sunday research report that both CPI and PPI inflation have been “exceptionally low” over the past two years, reflecting a significant imbalance between supply and demand. The persistent weakness in prices indicates that businesses are struggling to maintain pricing power, which could lead to prolonged stagnation if not addressed through stronger policy interventions.
Beyond inflation indicators, China’s economy is also being weighed down by sluggish consumer spending, an uncertain labor market, and a prolonged downturn in the property sector. Real estate, once a pillar of China’s economic growth, continues to struggle as major developers face financial difficulties and weak buyer confidence further drags down sales. The property sector crisis has created a ripple effect across other industries, affecting construction, home furnishing, and financial institutions tied to real estate investments.
Internationally, China’s economic challenges are compounded by rising trade tensions with the United States. Washington’s efforts to tighten trade restrictions and impose tariffs have added pressure to China’s export-dependent industries. With global demand softening and trade barriers increasing, China’s ability to rely on exports as a buffer against domestic weakness is becoming increasingly constrained.
Despite these mounting challenges, China has set an ambitious economic growth target of 5% for 2025, mirroring last year’s goal. However, in a sign that policymakers recognize the severity of the deflationary trend, the government has lowered its inflation target from 3% to 2% for the year. This adjustment suggests that authorities acknowledge the need for more aggressive measures to stabilize prices and restore confidence in the economy.
During the recent National People’s Congress, policymakers reiterated the importance of boosting consumption and ensuring economic stability. However, no large-scale stimulus package was announced, raising concerns that the government’s current approach may not 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 challenges facing the job market, stating that stabilizing and expanding employment this year will be “arduous” and under pressure. Weak hiring trends and slow wage growth have contributed to declining consumer confidence, making it even more difficult for policymakers to stimulate demand.
Meanwhile, China is taking targeted steps to support its struggling real estate market. Ni Hong, minister of housing and urban-rural development, emphasized that the government is making efforts to restore confidence in the property sector. A portion of the 4.4 trillion yuan ($608 billion) special bond quota allocated to local governments will be used to acquire completed but unsold commercial housing, which will be repurposed into affordable housing and worker dormitories. This move is aimed at both reducing excess supply in the real estate market and addressing housing affordability issues for lower-income workers.
With China’s deflationary cycle deepening and economic momentum weakening, the government faces mounting pressure to act decisively. The coming months will be crucial in determining whether China can navigate these economic challenges and prevent a prolonged period of stagnation.
