China slips back into deflation casting doubts about economic recovery

China slid back into deflation in October as the country struggles to pump up growth through domestic demand. China’s National Bureau of Statistics said on Thursday that consumer prices fell 0.2 per cent on-year in October and 0.1 per cent since September. The deepening of factory-gate deflation has now cast doubts about a broad-based economic recovery. Factory deflation continued for the 13th straight month in October. 

The headline figure was dragged by a further slump in pork prices, down 30.1 per cent from a decline of 22 per cent in September, due to an oversupply of pigs as well as weak demand. Pork is the country's most-consumed meat, and is a heavy-weight in its consumer price index. 

Core inflation slowed to 0.6 per cent in October from 0.8 per cent in September. Producer price index (PPI) fell 2.6 per cent year-on-year against a 2.5 per cent drop in September. The figures indicate the possibility of China again missing the government’s full-year headline inflation target of 3 per cent. 

China’s consumer prices that had slipped into deflation in July had returned into positive territory in August and were flat in September. 

Bruce Pang, chief economist at Jones Lang Lasalle, said that “combating persistent disinflation amid weak demand remains a challenge for Chinese policymakers”. An appropriate policy mix and supportive measures are needed to prevent the economy from spiraling into a downward drift, said Lasalle. 

However, a statistics bureau official in August had said that there was no deflation in China and “there will be no deflation in the future”. 

According to a report in Bloomberg, China is witnessing a low inflation rate due to domestic factors such as a housing slump and weak consumer confidence. International factors such as fall in global commodity prices and weak demand for Chinese-made goods have led to a fall in exports, which has in turn compounded its woes. 

Deflation causes prices of goods, services, labour and capital to fall. It might appear to benefit the consumers as it gives them more purchasing power with the same income. But it is not all rosy for the economy as the various sectors are adversely impacted with falling prices. It is not beneficial for borrowers either as they are required to pay money that is worth more than the money they borrowed. 

Deflation also weakens investor confidence, and is also likely to hurt consumption as consumers might wait for prices to fall further. 

(With Reuters inputs)

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