China economy: Is the latest stimulus enough to generate inflation?

Investing.com — Recent economic data from China indicates that the country’s inflation remains subdued despite new stimulus measures aimed at boosting demand. 

As per Citi Research, October’s Consumer Price Index rose 0.3% year-on-year, meeting their forecast but falling below the market expectation of 0.4%. 

The Producer Price Index contracted by 2.9% year-on-year, a sharper decline than anticipated. 

Both metrics underline a broader challenge in igniting inflation through the current stimulus package.

CPI figures show broad-based weakness, with food prices falling 1.2% month-on-month due to easing supply conditions. The drop was particularly pronounced in key staples like pork and vegetables. 

Energy prices also declined, reflecting volatility in global oil markets. Core inflation, which excludes food and energy, showed only a slight recovery, flagging persistent softness in domestic demand.

On the producer side, the PPI decline was driven by lower global commodity prices, compounded by weak end-consumer demand. 

While construction-related prices saw some gains due to targeted stimulus in infrastructure, other sectors, particularly durable goods, continued to see price contractions.

Citi Research notes that the government’s current stimulus measures, including fiscal risk resolution and trade-in initiatives, have had mixed effects. 

These efforts may improve liquidity and support specific sectors, but their impact on broader aggregate demand remains limited. 

The trade-in programs, designed to boost consumer spending, may inadvertently contribute to deflationary pressures by pushing prices lower through subsidies and discounts.

Going forward, Citi Research suggests that more robust domestic demand policies may be necessary to counter deflationary trends. 

The upcoming Central Economic Work Conference in December could provide a platform for discussing more decisive measures. 

As external risks, including potential trade tensions, persist, China’s policymakers might need to enhance fiscal and monetary responses to achieve a sustainable reflationary path.