Positive consumer inflation has been recorded in China for the first time in the last six months.

The mentioned indicator is largely the result of the Lunar New Year holidays. In this case, the seasonality factor is implied, which manifests itself in the fact that during the period of rapid growth in consumer activity of citizens, a natural increase in the cost of goods and services begins.

The Consumer Price Index (CPI) in February showed a growth of 0.7% compared to the same indicator for the same period in 2023. The relevant information is contained in official Chinese government reports published last weekend. It is worth noting that analysts interviewed by the media predicted that the CPI in China would grow by 0.3% in February.

Last month’s result is the first example since August 2023 when the specified indicator did not show a flatlining or falling. In January, the CPI decreased. The result for the first month of the current year is noteworthy in that in this case the decline rate was the fastest in the last 15 years.

Analysts underlined that the February CPI increase was partly due to celebrations related to the Lunar New Year. This year the holiday fell in February. In 2023, the celebrations took place in January. The date of the holiday varies depending on the cycles of the moon.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, says it is too early to conclude the end of deflation in China. The expert is convinced that the February CPI growth is not a sufficient indicator for appropriate estimates. Separately, Zhiwei Zhang noted that domestic demand in China still continues to show what can be called weakness.

For most of the past year, Beijing has been struggling with weak prices. The Chinese authorities are faced with a negative economic reality against the background of circumstances such as a sharp drop in the value of real estate associated with the prolonged crisis in this area, the collapse of the stock market, and a significant deterioration in consumer sentiment.

The People’s Bank of China has reduced interest rates several times. The financial regulator, through appropriate actions, sought to increase the volume of bank lending and return inflation to the target of 3%. At the same time, the efforts of the central bank have not produced significant results. The CPI in 2023 in China was fixed at 0.2%, which does not correspond to Beijing’s more positive expectations.

It is worth noting that from the point of view of prospects for the dynamic of the economic situation, deflation is a factor of negative impact. Against the background of a prolonged large-scale decline in the cost of goods and services, companies and consumers may postpone purchases or investments to a later date. This behavior is driven by expectations that the deflation trend will continue in the future and provide an opportunity to minimize the costs associated with commercial activities. Within the framework of the corresponding sentiments, a kind of situation of a vicious cycle is being formed, within which costs are decreasing, the scale of business is declining, and unemployment is growing.

In China, the cost of services reached a high-level last month. This trend is fully manifested in the sphere of tourism and entertainment. The tourism sub-index in China showed an increase of 23.1% year-on-year last month. This is the highest indicator among all categories. Nonetheless, the so-called holiday effect associated with the Lunar New Year is likely to cease to exist in March.

Nomura analysts in a research report released on Monday, March 11, said they expected CPI inflation in China to decrease to 0.4% year-on-year in March. They also noted that the cost of food is already on the decline trajectory, demonstrating the corresponding dynamic since the end of the festive events.

At the same time, China recorded an increase in manufacturing deflation in February. The Producer Price Index, which measures the wholesale cost of products at the factory gate, fell 2.7% year-on-year last month. The corresponding dynamic in China is fixed for the 17th month in a row. This trend is evidence of continued deflationary pressures in the upstream industries and a reflection of weak consumer demand.

This year, Beijing has to take measures to solve the difficult task of stimulating economic growth. China must also cope with the challenge of deflation. Last week, the Prime Minister of the Asian country, Li Qiang, said that the government had set an economic growth target of about 5% for this year. The Chinese leadership set the inflation target at 3%.

Li Qiang last week also promised to transform the Asian country’s economic growth model. He noted the intention of the Chinese leadership to curb debt risks in the economy. With a high degree of probability, these statements by Li Qiang are evidence that the municipal authorities of the Asian country will weaken aggressive investments in infrastructure construction projects.

Pan Gongsheng, the governor of the People’s Bank of China, told reporters last week that the financial regulator would continue to maintain a supportive stance on monetary easing. The head of the central bank also admitted the possibility of further interest rate cuts in 2024. According to Pan Gongsheng, these decisions will bolster the economy.

Zheng Shanjie, head of the country’s economic planning department, said last week that the Chinese government would present a new initiative to boost consumer spending. In this case, among other things, measures are envisaged to stimulate large-scale updates of equipment and the replacement of old durable goods, such as cars and household appliances, with new ones.

At the same time, economic growth and price increases will primarily depend on how Beijing implements a policy of stimulating demand and increasing confidence.

Citi analysts said on Monday that after the conclusion of the National People’s Congress, all attention may be focused on demand-related initiatives. In this context, they specifically mentioned the trade-in program for durable goods.

As we have reported earlier, China’s Exports Exceed Forecasts.