China has posted in February a lower inflation rate providing consumers with good news, but suggesting the world’s second largest economy was losing some steam prompting analysts to call for support from the government with increased spending and more monetary easing.
Consumer prices were up just 2% in February compared to the same month a year ago. Factory gate prices dropped for the 24th straight month underscoring a lack of demand.
One economist for HSBC said it would was too early to consider the situation a deflation risk, but prices are facing downward pressure.
In February, the consumer price index compared with an increase in January of 2.5%. Prices of food were higher by 2.7% and were the biggest contributor to the higher prices. Prices that were for non-food items were up only 1.6% for the month.
While consumers are benefited by low inflation, it can also signal weak demand, which hampers business profits and potentially feeds into wage increases being slower.
Going forward one analyst said the deflation risk has increased. Therefore, the analyst said monetary easing was needed along with more fiscal stimulus if the government wants to achieve its target of 7.5% growth.
An anti-corruption campaign by the government might also have been part of the reason inflation was driven down, said the analyst. Because of the reduction in extravagance for officials the luxury goods markets might have been repressed, though that broader weakness in the economy is likely the explanation.
At the same time, the index for the producer prices, which tracks the prices of finished goods as they leave the factory gate, dropped by 2% compared to the same period a year ago. That is a faster rate than in January when it fell by 1.6% from the previous year.
Economists said part of the manufacturing sectors deflation was due to raw materials being cheaper in global markets, which is passed on to customers. However, it might also show weak demand in the domestic market of China.