China’s CPI Drops Sharply as Deflationary Pressures Persist

China's consumer price index (CPI) fell 0.7% in February, marking the steepest decline in 13 months and reversing January’s 0.5% rise. The drop exceeded economist forecasts of a 0.5% decline, reflecting weak domestic demand as households remain cautious amid job and income concerns. Core CPI, which excludes food and fuel, dipped 0.1%, the first decrease since January 2021.

Food prices plummeted 3.3% compared to a 0.4% rise in January, influenced by the timing of Lunar New Year celebrations. On a monthly basis, CPI fell 0.2%, missing expectations of a 0.1% drop. The producer price index (PPI) declined 2.2% year-on-year, marking the 18th consecutive monthly fall.

China's government maintained its 2025 GDP growth target at 5% while lowering the annual inflation target to 2% from 3%. Beijing has pledged stronger measures to boost consumption, including expanding a consumer subsidy program to 300 billion yuan ($41.42 billion) for electric vehicles and home appliances. However, structural issues in welfare and employment continue to weigh on spending.

Economists warn that China’s economy faces persistent deflationary risks. Zhiwei Zhang, president of Pinpoint Asset Management, noted that while sentiment improved in the tech sector, weak domestic demand remains a challenge. Analysts suggest more aggressive fiscal and monetary policies, including interest rate cuts, to stimulate growth.

Meanwhile, global trade tensions and industrial overcapacity are forcing Chinese exporters into price wars, further pressuring the economy. As deflation lingers, concerns grow over China's ability to sustain a steady economic recovery.