China Faces Steepest Consumer Price Drop in 14 Years, Heightening Deflationary Risks

China's consumer prices experienced their sharpest decline in over 14 years in January, with the consumer price index (CPI) falling 0.8% from a year earlier, the largest drop since September 2009. This adds to the persistent deflationary risks in the world's second-largest economy as it grapples with post-COVID recovery challenges.

The struggling economy, marked by a contraction in factory activity in January, faces deflationary pressure, according to economists. China's central bank recently made a significant cut to bank reserves to support the fragile economy, but analysts emphasize the need for more measures to boost confidence and demand.

In addition to the CPI decline, the producer price index (PPI) also fell by 2.5% year-on-year in January, posing a threat to smaller Chinese exporters engaged in intense price competition amid shrinking business. Policymakers are urged to take prompt and aggressive actions to prevent entrenched deflationary expectations among consumers. Some economists anticipate mild reflation in 2024, with a forecasted annual CPI inflation of 1.2% year-on-year, contingent on the return of consumer confidence.