China's Consumer Prices Rise in May, Holding Above Zero for Fourth Month

During May, China's consumer prices continued to rise, marking the fourth consecutive month of positive growth after a period of significant deflation. The consumer price index experienced a 0.3% increase from the previous year, aligning with the modest gain seen in April. However, this figure fell slightly below the median forecast of 0.4% as indicated by a Bloomberg survey of economists. On the other hand, factory-gate prices, measured by the producer price index, remained in deflation, sliding by 1.4% year-on-year in May.

Economists have highlighted that weak domestic demand continues to exert pressure on prices. Woei Chen Ho, an economist at United Overseas Bank Ltd., emphasized the significant contribution of food price deflation to the overall weakness in prices, but anticipates an easing in the coming months due to a more favorable base effect. Moreover, core inflation, which excludes volatile food and energy prices, saw a mild increase of 0.6% compared to the same period last year. NBS analyst Dong Lijuan described the consumption market as generally stable in May.

Challenges in Stimulating Household Spending

The Chinese government has faced challenges in stimulating higher household spending amidst a protracted real estate slump and a weak job market. Companies, grappling with the impact of falling producer prices, are displaying reluctance towards investment. This situation also poses the risk of consumers becoming more hesitant to spend, anticipating further price declines in the future. The prolonged weakness in domestic demand has led to the longest deflation streak since the Global Financial Crisis, even after the country's reopening from the pandemic.

Future Outlook and Factors Influencing Prices

Economists surveyed by Bloomberg anticipate a modest 0.7% increase in consumer prices for the entire year, significantly lower than the official 3% target. It's worth noting that some attributes of the rise in consumer prices may be attributed to administrative decisions rather than a genuine improvement in demand. Recent months have seen local governments increasing utility costs and train fares, potentially elevating the price index while reducing households' spending power for other purchases.

Analyst Comments and Business Implications

Analysts have emphasized the continued weakness in price pressures and the challenges associated with stimulating household spending. These trends have significant implications for businesses, particularly in the context of ongoing deflationary pressures and subdued consumer demand. It is imperative for policymakers and businesses alike to carefully navigate these complex economic dynamics to support sustained recovery and stable consumer market conditions.