China's Inflation Nears Zero Despite Stimulus Efforts

China's consumer inflation weakened further in December, ending the year near zero and extending a four-month deceleration, Bloomberg reports. This setback dampens the impact of government stimulus aimed at combating deflation and boosting demand.

The consumer price index (CPI) rose just 0.1% year-on-year, matching the median forecast of economists surveyed by Bloomberg and marking a slowdown from the 0.2% increase in November.

Factory deflation persisted for a twenty-seventh consecutive month, though the producer price index (PPI) recorded a slower decline of 2.3%. On a more positive note, core CPI, which excludes volatile food and fuel prices, picked up for the third month in a row, reaching 0.4% year-on-year, its highest level since July.

This persistence of deflationary pressures contrasts sharply with the elevated inflation risks flagged by US Federal Reserve officials and accelerating price growth in the eurozone. Beijing is concerned that an entrenched cycle of price decreases could hinder household spending, damage corporate revenues, stifle investment, and lead to further salary cuts and layoffs.

For the full year, consumer prices only inched up 0.2%, falling significantly short of the 1.1% gain economists had predicted at the beginning of 2024.

Chinese stocks pared losses after the data release, with the CSI 300 Index trading little changed following an earlier 0.5% decline.

Dong Lijuan, chief statistician at the National Bureau of Statistics (NBS), attributed the December CPI slowdown to a 0.5% annual drop in food prices. She also cited monthly declines in PPI to price fluctuations in commodities and a seasonal slowdown in some industries.

The most recent inflation readings suggest that the GDP deflator, a broader measure of economy-wide prices, will likely extend its drop for the seventh straight quarter, according to Bloomberg Economics. Citigroup Inc. economists predict that it will remain negative in 2025, marking the longest such streak since the early 1960s.

Despite these weak price readings, officials led by President Xi Jinping have made boosting consumption and domestic demand the top priority this year. They have pledged to use increased public borrowing and spending, as well as monetary easing, to stimulate growth in 2025.

China is expanding a program to subsidize consumer products and is increasing funding for industrial equipment upgrades. On Wednesday, officials announced that more products would be eligible for subsidies, with companies in sectors such as electronic information and work safety included in this year's program.

However, economists such as Robin Xing of Morgan Stanley believe the Chinese government faces a prolonged battle to reflate the economy and shift sentiment.

"That is not going to dismiss deflationary concerns," said Michelle Lam, Greater China economist at Societe Generale SA, referring to consumer prices. "We saw rather broad-based declines in items such as housing goods and services and health care."

The sluggish pace of price increases likely strengthens arguments for monetary easing within the People's Bank of China (PBOC). This could increase tension between the central bank's conflicting goals of supporting growth and slowing the yuan's depreciation.

Officials have previously indicated their willingness to loosen policy further by cutting interest rates and reducing banks' required reserve ratio to free up money for lending and investment. However, the weak CPI report may not be the main catalyst for further PBOC easing, according to Lynn Song, chief greater China economist at ING Bank in Hong Kong. Nevertheless, it provides further evidence supporting the case for more rate and reserve requirement ratio cuts this year.