Deflation Risks Mount in China as Covid Curbs Weaken Demand

Deflation risks are mounting in China as Covid-19 outbreaks and restrictions reduce demand and falling commodity prices put pressure on businesses to lower prices.

Bloomberg said that the producer price index in China likely dipped into deflation in October for the first time in nearly two years, citing its survey of economists head of data due Wednesday.

The index is expected to have fallen 1.6% year on year after rising 0.9% in September. Consumer price growth is also expected to slow to 2.4% from 2.8% in September.

Despite the government’s efforts to boost demand for electric cars and houses, the data surveyed by Bloomberg shows China’s domestic demand has decreased further as movement restrictions to contain Covid-19 outbreaks hamper spending, export demand falls, and home construction continues to collapse.

According to Australia and New Zealand Banking Group’s senior economist for Greater China, Raymond Yeung, “China is falling into a deflationary spiral.” He remarked, “Domestic demand is very weak,” referring to falling production costs and a core consumer price index (CPI) that excludes food and energy.