China can attribute the better-than-forecast seasonal rise in consumer price inflation in February to the Lunar New Year break. However, the holiday break, known for significant spending on food and travel, had no impact on the almost endemic deflation in producer prices, which continued to decline for yet another month in February.
The consumer price index (CPI) rose by 0.7% year-on-year in February, rebounding from the steepest fall of 0.8% in over 14 years recorded in January, according to data from the National Bureau of Statistics (NBS) released on Saturday. The CPI saw a robust 1.0% month-on-month increase, marking the largest rise in three years. Economists had anticipated a 0.3% gain year-on-year and a 0.7% growth month-on-month.
The rebound in food prices, coupled with the timing of the holiday, largely explained this uptick. The Bureau of Statistics noted that food prices experienced the smallest decline in eight months (-0.9% compared to -5.9% in January), driven by increases in the cost of pork and fresh vegetables. In contrast, non-food inflation accelerated sharply to 1.1% from the previous 0.4%, with prices rising across most components including clothing, housing, health, and education, while the decline in transport prices moderated considerably.
In contrast, the Producer Price Index (PPI) fell by 2.7% from a year earlier in February, accelerating from a 2.5% decline the previous month, surpassing the market's forecast of a 2.5% decline. February marked the 17th consecutive month of contraction in China’s PPI, highlighting ongoing economic challenges despite modest support measures from Beijing.
The year-on-year growth in consumer prices was the highest in 11 months, thanks to increases in key food items and heightened travel spending during the week-long break. The later timing of the Lunar New Year break in mid-February, compared to late January in 2023, contributed to a smaller January CPI decline of 0.8% followed by a 1% rise in February, similar to the previous year.
Economists caution that the risks of further consumer price deflation persist due to weak consumer activity and confidence. Despite strong demand for key commodities, deflation continues across producing sectors, raising concerns. Premier Li Qiang's announcement of an ambitious economic growth target of around 5% faces challenges amid a post-COVID recovery losing momentum. The government aims for a 2024 inflation target of 3%, aligning with goals set since 2015, despite missing targets in recent years.
Moreover, efforts to revitalize the property sector, including promises of additional borrowing, lack substantial positive impacts. The government's focus on achieving an employment target of 11.7 million for 2024 reflects persistent challenges, particularly concerning youth unemployment, which remains high despite recent adjustments in statistical reporting.
