In a concerning turn of events, China’s economy has slipped into deflation, marked by a drop in consumer prices for the first time in over two years, pointing to weakening demand. The country’s Consumer Price Index (CPI) recorded a 0.3% decline in July compared to the previous year, a trend not seen since February 2021.

Various sectors experienced price decreases last month, including food, transportation, and household goods. Notably, pork prices plummeted by 26%, while vegetable prices dipped by 1.5%. Moreover, the Producer Price Index (PPI), which measures factory gate prices, witnessed a 4.4% drop year-on-year in July. This marked the tenth consecutive decline in PPI and the first instance since November 2020 where both consumer and producer prices decreased within the same month.

These signs of deflation have raised concerns about the potential for a prolonged period of economic stagnation in the world’s second-largest economy. Analysts from ING Group noted that the occurrence of both consumer and producer price deflation supports the idea of a widespread economic slowdown in China.

China’s economic growth had been lackluster in the April to June quarter, with minimal expansion compared to the previous quarter. The initial economic boost triggered by the relaxation of pandemic restrictions last year has faded. The nation is grappling not only with a prolonged downturn in the real estate sector but also with weak trade.

Unlike many developed economies that employed substantial COVID-era support, China opted for a more restrained approach, avoiding rampant inflation. However, this strategy led to a drop in disposable household income as wages and property asset values stagnated.

Although the government has implemented measures such as adjusting interest rates, offering support to the private sector, and making incremental attempts to stimulate the property market, these actions have yielded limited results in revitalizing economic recovery. Analysts argue that Beijing needs to implement more robust strategies to bolster confidence and stimulate consumer spending.

With economic momentum continuing to wane due to lackluster domestic demand, experts stress the urgency of implementing effective measures to rejuvenate China’s economy and steer it away from a prolonged period of deflation and stagnation.