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China reports consumer deflation for first time since 2009, raising questions about spending power

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China Macro Economy reported that China’s official consumer price index (CPI) fell to minus 0.5 per cent in November from a year earlier – down from 0.5 per cent growth in October. The country’s headline consumer inflation dropped into negative territory in November for the first time in eleven years.

The fall was led by a 2.2 per cent year on year decline in the price of food, with the price of pork – a staple meat on Chinese dinner tables – plunging by 12.5 per cent, thanks to a rebound in pig stocks after African swine fever was brought under control.

Report authors Orange Wang and Zhou Xin suggested that “a negative CPI reading is often seen as a sign of weak consumer spending and sluggish economic growth. China set a CPI target of about 3.5 per cent for 2020, compared with 3.0 per cent last year, but consumer prices between January and November rose only 2.7 per cent from a year ago”

Though the country has had to contend with the pandemic, the CPI recent reading in months contradicts Beijing’s “dual circulation strategy” a policy that aims to drive future growth by relying on domestic consumption. “It’s not painting a picture of consumer spending exuberance,” said He Wei, a China economist at research firm Gavekal.

Julian Evans-Pritchard, senior China economist at Capital Economics, said the drop in November CPI “was almost entirely driven by improvements in pork supply and isn’t evidence of faltering demand.”

Larry Hu, a China economist at Macquarie Capital, said that China’s economy is still booming and the central bank may not factor the CPI reading too much in its policy consideration.

Whether CPI is a good indicator for consumer inflation is a matter of debate. China’s former central bank governor Zhou Xiaochuan wrote last month that inflation indicators must factor in asset prices or they will lose relevance to reality.

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