China’s Consumer Deflation Returns as Recovery Remains Fragile

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China’s deflation pressures worsened in October as consumer prices dipped back below zero and producer cost declines deepened, adding to expectations the economy needs more stimulus to shore up growth.

Consumer prices fell 0.2% last month after hovering near zero in the previous two months, according to data from the National Bureau of Statistics Thursday, lower than the median forecast in a survey of economists. Producer prices fell for a 13th straight month, dropping 2.6%.

China has battled stubbornly weak prices for much of this year. Consumer prices slipped below zero in July and have been teetering on and off the edge of negative year-on-year growth, undermining an August assessment by the People’s Bank of China that prices would rebound from the summer’s patch. Coupled with the ongoing declines in factory-gate costs, that’s led to calls for more support to counter deflationary pressures.

“Combating persistent disinflation amid weak demand remains a challenge for Chinese policymakers,” said Bruce Pang, chief economist for Greater China at Lang LaSalle Ltd. “An appropriate policy mix and more supportive measure are needed to prevent the economy from a downward drift in inflation expectations that could threaten business confidence and household spending.

Low inflation has been one of the main reasons cited by economists who argue that China’s economy is growing below its potential and needs more monetary and fiscal stimulus. Beijing has stepped up monetary and fiscal easing in recent months, such as cutting interest rates and the amount of cash banks must keep in reserve, as well as issuing additional sovereign bonds.

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