China’s deflation persists as consumer and producer prices decline

[WORLD] In March, China's consumer prices fell for the second month in a row, but producer deflation remained, as concerns about the economic outlook grew amid rising tariff uncertainties. This year, the economy has gotten off to an inconsistent start. A modest increase in retail sales and a healthy recovery in factory activity have been counterbalanced by rising unemployment and deflationary pressures, fueling calls for greater stimulus amid a deteriorating global trade war.

The persistent deflationary trend underscores the challenges facing Chinese policymakers as they balance structural reforms with short-term economic stabilization. Analysts note that weak consumer confidence, driven by a sluggish property market and job market uncertainties, continues to weigh on spending despite government efforts to spur demand.

The consumer price index fell 0.1% last month compared to a year ago, according to National Bureau of Statistics statistics released on Thursday. This was slower than the 0.7% decrease in February, but it fell short of the Reuters poll's estimate of stable prices. CPI declined 0.4% month on month, compared to a 0.2% drop in February, and fell short of the expected 0.3% dip.

Meanwhile, food prices—a key component of China’s CPI basket—declined by 2.7% year-on-year in March, marking the sixth consecutive month of contraction. Pork prices, a major driver of food inflation, fell sharply due to oversupply, exacerbating broader deflationary pressures. Economists warn that prolonged weakness in food prices could further dampen rural incomes, complicating efforts to rebalance growth toward domestic consumption.

Core inflation, excluding volatile food and fuel prices, increased 0.5% in March from a year ago, reversing a 0.1% drop in June. Consumption has been a focus this year, with net export contributions to growth expected to fall as Beijing imposes countermeasures against US tariffs, putting China's 5% GDP growth objective to the test.

Recent trade data highlights the growing headwinds from external demand, with exports contracting unexpectedly in March. The decline reflects not only weaker global demand but also the impact of U.S. and EU trade restrictions on key Chinese industries, including electric vehicles and solar panels. This has intensified pressure on policymakers to bolster domestic consumption as a primary growth driver.

"We expect fiscal policies to lead domestic demand expansion amid external shocks," Citi economists wrote, estimating extra funding of 1 trillion yuan ($136.06 billion) to 1.5 trillion yuan by the middle of the year. They're seeing "options of expansion in trade-in subsidies, childcare subsidies and support for low-income households all on the table."

Local governments have already begun rolling out targeted measures, including consumption vouchers and subsidies for home appliance upgrades, to stimulate household spending. However, analysts caution that without broader reforms to strengthen social safety nets and income growth, such measures may only provide temporary relief rather than sustained demand recovery.

Last month, China's banking regulator directed lenders to reduce consumer credit ceilings and loan terms in order to boost consumption. The producer price index fell 2.5% in March from a year ago, following a 2.2% reduction in February, the worst in four months and lower than the predicted 2.3% drop.