China to Lower Inflation Target for First Time in Two Decades

China is set to lower its inflation target for the first time since 2004, signaling a more realistic approach to combatting deflationary pressures, Bloomberg reports.

The shift comes as the world's second-largest economy struggles to overcome weak consumer demand and a prolonged property slump.

Almost all of China's 31 provinces have revised their inflation targets downward for 2024, with most aiming for around 2% price growth, according to statements released following government meetings this month. This marks a significant decrease from last year's target of 3%, which also mirrored the national goal.

The shift in provincial targets is likely a precursor to a similar adjustment in the national inflation target, which is expected to be unveiled at the annual session of China's parliament in March, according to economists at Goldman Sachs Group Inc. and Chinese brokerages like Guosheng Securities.

The move would mark a significant departure from China's longstanding practice of treating its annual inflation target as a ceiling rather than a binding goal.

"The new goal would represent a level officials 'aspire toward,'" said Lynn Song, chief economist for Greater China at ING Bank in Hong Kong, to Bloomberg. "Unlike the growth target, there's rarely specific measures taken to try and achieve the inflation target."

This change reflects a more realistic approach to managing the $18 trillion economy, as China confronts the threat of higher US tariffs and a persistent domestic demand weakness stemming from the housing crisis.

The lower inflation target could also signal a reduction in China's credit expansion goal, which has historically been in line with targets for both real economic growth and price growth. Last year, the stock of credit increased by 8%, equivalent to the combined sum of the other two targets.

China began publishing annual targets for consumer inflation in 2001. Prior to that, the government relied on other price indicators and did not always provide a numerical goal.

While advanced economies typically target 2% inflation, the People's Bank of China operates with multiple, sometimes conflicting, objectives, including promoting growth and stabilizing the yuan. Recent pressure on the currency has led the central bank to tighten monetary policy, resulting in a more subdued inflation outlook.

Economists have consistently overestimated inflation in China over the past two years, as the property slump and a worsening job market weigh on household spending. Despite government pledges to prioritize boosting consumption in 2025, current measures have had only a temporary impact.

According to a Bloomberg survey of analysts, China's consumer inflation is projected to reach 0.8% by the year-end.

Even with a potential 2% inflation target, the market impact is likely to be minimal, given that CPI inflation has been below 1%, according to Goldman Sachs economists.

"If the 3% to 2% change in the CPI inflation target is meant for moving toward a 'target' rather than a 'ceiling', this would imply more policy measures to boost demand and inflation," said Andrew Tilton, a Goldman economist, in a report.