China’s consumer and producer prices continued to fall in May, underscoring ongoing deflationary pressures as the world’s second-largest economy grapples with weak domestic demand and uncertainty surrounding trade relations with the United States.
Official data released Monday by the National Bureau of Statistics (NBS) showed that the consumer price index (CPI) declined 0.1% year-on-year in May, matching the drop recorded in April and marking the fourth consecutive month of consumer deflation. The decline was slightly better than expectations from economists surveyed by Reuters, who predicted a 0.2% fall.
The producer price index (PPI), a key gauge of factory-gate prices, fell 3.3% compared with a year earlier — the sharpest drop since July 2023. This marks the 32nd straight month of producer deflation, reflecting a prolonged downturn in upstream prices, particularly in coal, oil, and gas extraction industries.
The latest figures come amid a fragile trade truce between China and the United States. Although a preliminary agreement in May led to partial tariff reductions — bringing US duties on Chinese goods down to around 51.1% — tensions persist. Negotiators from both countries are set to resume talks in London this week, with unresolved issues including export approvals for critical minerals and new US visa restrictions.
The uncertainty surrounding trade, combined with the global economic slowdown, has prompted Chinese manufacturers to redirect more of their production to the domestic market. This shift, however, has led to increased competition and price discounting, particularly in the automotive sector, where price wars among electric vehicle makers have intensified.
Despite a string of recent holidays, consumer spending remains tepid, with households facing pressures from stagnant wages, high youth unemployment, and a still-weak property market. Core inflation, which excludes food and energy, rose 0.6% in May — its highest level since January but still modest by historical standards.
NBS Chief Statistician Dong Lijuan acknowledged that the downward pressure on prices is a reflection of sluggish domestic demand and reiterated the need for “more forceful and targeted stimulus measures.”
In response to these challenges, China’s central bank recently cut key interest rates and reduced the reserve requirement ratio for banks to improve liquidity. Analysts expect further monetary easing later this year if growth remains sluggish.
Economists warn that the risk of entrenched deflation could persist for months, potentially weighing on broader economic recovery. According to Bloomberg’s survey, China’s CPI is forecast to rise only 0.3% for 2025, far below the government’s 3% inflation target.
“While exports have held up, they are unlikely to sustain growth given global demand pressures and tariffs,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “Ultimately, China needs stronger domestic consumption to reverse the deflation trend.”
As the economy continues to face structural challenges and international headwinds, financial markets and policymakers are closely watching upcoming trade negotiations, as well as potential new stimulus announcements expected at the Lujiazui Forum later this month in Shanghai.
Reuters, CNBC, Bloomberg, and the Wall Street Jounral contributed to this report.
