When measured as an annualized change, China’s Consumer Price Index (CPI) was down 0.1% year-over-year in May—the fourth deflationary month in a row. This reduction is mainly due to falling consumer food inflation and depressed energy prices. According to the National Bureau of Statistics (NBS) data released today, there was a 0.2% mom decrease in the Consumer Price Index (CPI). Energy prices were the key driver, accounting for about 70% of that total drop.
The deflationary trend that has characterized the current economic malaise in China is evidenced by CPI averaging -0.1% yo-y from January through May. In contrast, the Core Consumer Price Index (CPI), which excludes food and energy prices, averaged 0.4% during the same period. This divergence speaks to just how important shifting and often volatile commodity prices have been to the overall macro cost of living in this commodity dependent nation.
For starters, weak energy prices have been central to the inflationary picture. According to the NBS, these falling prices have played an outsized role in creating this extended deflationary environment. The CPI’s monthly decline is a clear indication of how shifting market dynamics can affect consumer spending power and economic growth.
“China’s Consumer Price Index (CPI) deflation continued into the fourth straight month in May due to declining domestic food prices and weak energy prices.” – Ho Woei Chen
The Producer Price Index (PPI), the measure of wholesale prices, hinted at the same disturbing direction. From January through May, it experienced a year-over-year average drop of 2.6%. In fact, the PPI deflation widened significantly more than expected to -3.3% in May, for the biggest decrease in 22 months. This squeeze only adds to the pressure producers are feeling in an ever-slowing economic climate.
As China continues to take stock of these important economic situations, overviews are still tempered. As a base case, we expect the CPI to level off at 0.0% by 2025. At the same time, we forecast the PPI to fall to -2.5%. These projections indicate that if large-scale, transformative intervention does not happen, deflationary forces will keep working to slow economic recovery.
“In Jan-May, headline and core CPI averaged -0.1% y/y and 0.4% y/y respectively while PPI averaged -2.6% y/y. We maintain our forecast for 2025 CPI at 0.0% while revising our forecast for PPI to -2.5% from -2.0%. For the monetary policy, we expect an additional 10-bps interest rate cut in 4Q25 with the 7-day reverse repo rate, 1Y LPR and 5Y LPR to end the year at 1.30%, 2.90% and 3.40% respectively. The prospect of another 50-bps cut to the RRR remains.” – Ho Woei Chen
In reaction to these economic indicators, analysts at major financial institutions are predicting even more monetary policy tightening. Look for one more 10 bp interest cut in Q4/25. If so, this move would be interpreted as a precursor to further easing measures aimed at propping up growth in the face of deflationary pressures.
The expected end-of-year rates for the range of monetary policy tools are now 1.30% on the reverse repo rate. Further cuts to the Loan Prime Rates (LPR) are set to be announced. All of these measures demonstrate a new, lasting commitment by federal policymakers to tackle the great challenges in today’s economy and cultivate a robust recovery.