China Consumer Prices Fall Again in May, Deflation Concerns Grow as Demand Stays Weak

China’s consumer prices declined for a fourth consecutive month in May, highlighting rising concerns over deflation in the world’s second-largest economy. Official data released on Monday by the National Bureau of Statistics showed the Consumer Price Index (CPI) dropped 0.1% from a year earlier, slightly better than the 0.2% fall expected by analysts.

This marks the continuation of a downward trend that began in February, when the CPI declined 0.7% year-on-year. The index posted two additional 0.1% declines in March and April. Weak household spending and oversupply in certain industries, such as automobiles, continue to weigh on prices.

Core inflation, which excludes volatile food and energy prices, rose 0.6% in May, the highest since January. However, this modest rise was insufficient to offset broader downward pressure.

Producer prices also dropped sharply in May. The Producer Price Index (PPI), which reflects prices at the factory gate, fell 3.3% year-on-year — the steepest decline since July 2023 and deeper than the 3.2% drop forecasted by analysts. PPI has remained in deflationary territory since October 2022.

Sectors such as coal mining and oil and gas extraction saw the largest price declines, falling by 18.2% and 17.3% respectively compared to a year earlier.

Economists point to a range of factors contributing to the weakness in prices, including sluggish domestic demand, falling property values, and aggressive discounting in the auto industry. Zhiwei Zhang, chief economist at Pinpoint Asset Management, said the price war in the automotive sector has played a significant role in suppressing inflation.

“The price war in the auto sector is another signal of fierce competition driving prices lower,” Zhang said. “Eventually, China needs to rely on domestic demand to fight the deflation.”

In response, Chinese policymakers have taken steps to stimulate the economy. On May 7, the People’s Bank of China cut key interest rates by 10 basis points and lowered the reserve requirement ratio by 50 basis points to improve liquidity and credit availability.

These monetary measures came shortly after trade tensions with the United States intensified. U.S. President Donald Trump raised tariffs on Chinese imports to 145% in April, prompting retaliatory actions from Beijing. However, a temporary trade agreement was reached in Geneva on May 12, resulting in a partial rollback of tariffs. U.S. duties on Chinese goods now stand at 51.1%, while Chinese tariffs on U.S. imports have been lowered to 32.6%.

Despite the truce, friction remains. The U.S. has accused China of delaying the approval of critical mineral exports, while Beijing has criticized new U.S. restrictions on student visas and semiconductor exports.

Chinese Vice Premier He Lifeng is expected to meet U.S. Treasury Secretary Scott Bessent in London later today for renewed trade negotiations. Both sides are under pressure to stabilize their economic ties and avoid further disruptions.

Meanwhile, speculation is growing about further policy support. State-run China Securities Journal reported last week that the central bank may reduce the reserve requirement ratio again later this year and potentially resume government bond purchases to support growth.

Markets are also watching the upcoming Lujiazui Forum in Shanghai, where key policy announcements may be made by senior officials including PBOC Governor Pan Gongsheng.

China is expected to release full trade data for May later today. According to a Reuters poll, analysts expect exports to rise 5% year-on-year and imports to decline by 0.9%.

With both external and internal challenges persisting, economists warn that more targeted and forceful measures may be required to revive confidence and stabilize prices.