China’s Consumer Inflation Cools Sharply as Holiday Boost Subsides

China’s consumer inflation cooled sharply in March as the holiday boost to food and travel prices waned, possibly reigniting concerns over deflation amid lukewarm domestic demand.

The consumer-price index rose 0.1% in March from a year earlier, compared with the 0.7% increase in February, the National Bureau of Statistics said. A Wall Street Journal poll of economists had tipped 0.4% growth.

Weak consumer prices might revive deflation concerns after China ended a four-month streak of deflation in February.

The lower-than-expected CPI reading came after several banks, including Goldman Sachs, Morgan Stanley and the Asian Development Bank, raised their projections of China’s economic growth this year close to Beijing’s target of around 5%, on the back of recent export strength and a manufacturing revival.

However, a prolonged property downturn, hefty local government debt and sagging consumer demand have restrained the recovery of the world’s second largest economy.

Global credit-rating company Fitch on Wednesday cut China’s credit rating outlook to negative from stable, citing risks to the country’s public finances due to the uncertain economic outlook.

The fall in consumer prices was due to a seasonal decline in consumer demand after the Lunar New Year holiday while market supply was sufficient, said Dong Lijuan, a senior statistician with China’s statistics bureau.

Food prices dropped 2.7% in March, widening from the 0.9% decline in February. Prices of pork and fresh vegetables reversed their on-year gains in February to a fall of 2.4% and 1.3%, respectively, in March. Other food items, such as eggs, fruit and other meats, reported bigger falls last month.

Nonfood prices increased 0.7% in March, compared with a 1.1% growth in February. Service prices moderated last month due to a retreat in travel costs. Travel prices slowed to a 6.0% on-year increase, compared with a 23.1% growth in February, according to data from the statistics bureau.

Core CPI, which excludes volatile food and energy prices, rose 0.6% in March, slowing from the 1.2% rise in February.

On a monthly basis, CPI declined 1.0% in March, reversing from a 1.0% increase in February.

Meanwhile, China’s producer-price index fell 2.8% in March from a year earlier, compared with February’s 2.7% fall and matching the surveyed economists’ expectation for a 2.8% decline. Producer prices stayed in deflation for 18 months in a row.

Capital Economics thinks easing food-price deflation and a modest economic recovery will support a slow reflation in the near term.

But persistent oversupply will likely keep inflation low, with CPI inflation to remain below prepandemic levels for the foreseeable future, Julian Evans-Pritchard, head of China economics, said in a note.

Producer-price inflation will likely stay in negative territory, with rapid investment in manufacturing capacity weighing on factory-gate prices, the research firm said.

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