China’s inflation rate has hit a two-year low, with the National Bureau of Statistics (NBS) revealing a year-over-year increase of 0.1% in April, down from 0.7% in March.
The decline in prices has been partly attributed to a drop in food and beverages prices, and some analysts are warning about the potential dangers of deflation.
Factors behind the decline
The lower inflation rate in China is due in part to a decrease in food and beverages prices, which fell from 2.4% in March to less than 1% in April. Core inflation, which excludes food and beverage prices, rose 0.7% year-over-year.
Unfortunately, despite efforts made, it appears that the country’s current inflation rate is still below the targeted 3% for the year, indicating an uncertain outcome.
Despite concerns from analysts about the slow economic recovery in China following the pandemic, Zou Lan, an official with the People’s Bank of China (PBOC), dismissed these worries, stating that there is no basis for long-term deflation or inflation. Consumer demand is anticipated to pick up during the second half of the year.
Expert recommendations
Standard Chartered expects inflation levels to hit 0% in the coming months, as a result of a crude-oil price spike in the first half of 2022 creating a high comparison base. Despite the slow inflation level, the bank predicts a growth rate of over 5% without adjusting interest rates, which currently stand at 1%.
Some experts, fearing the possibility of deflation, have proposed various measures to counter it. Li Daokui, a professor of economics at Tsinghua University and former member of the PBOC advisory board, has urged the government to distribute cash handouts to citizens to boost demand.
Li believes that 500 billion yuan in consumption vouchers could drive one trillion yuan in overall consumption, with the state receiving over 300 billion yuan in taxes from the spending enabled by the cash handouts.
Comparing to the U.S.
The low inflation rate in China is in stark contrast to the US, where consumer prices rose by 4.9% in April, as the Federal Reserve attempted to manage escalating prices by hiking rates 10 consecutive times.
China’s service prices increased by 1% in April compared to the previous year, up from the 0.8% recorded in March. This increase was driven by consumer spending on travel and other leisure services.
The economic recovery in China seems unbalanced, with the service sector normalizing while the manufacturing sector remains muted, according to Zhiwei Zhang of Pinpoint Asset Management.
China’s producer price index, which measures the prices paid by wholesalers, fell 3.6% in April compared to the previous year, due to the decline in global prices of raw materials such as iron ore and crude oil.
China has set a growth target of around 5% for the year, the lowest goal in decades, with Premier Li Qiang warning that achieving this will be no easy task. The current low inflation rate, however, highlights the challenges the nation faces in balancing its economic recovery amid a changing global landscape.
