China’s consumer inflation dropped far more than expected to fall below zero for the first time in 13 months, an assessment skewed by seasonal distortions but also a sign of deflationary pressures persisting in the economy.

The consumer price index declined 0.7% from a year earlier, the National Bureau of Statistics said Sunday, compared with a 0.5% gain in the previous month. That was lower than all but one forecast in a Bloomberg survey of analysts, whose median estimate was for a 0.4% drop.

Bloomberg Daybreak Asia

Breaking Down China Eco Data

20:46

Even when adjusted for the effect of an earlier-than-usual Lunar New Year holiday, consumer inflation slowed to among the weakest levels in months, according to Goldman Sachs Group Inc. A decline in services prices, combined with a rare negative reading for core inflation, were among symptoms of sluggish consumption.

China’s core CPI, which excludes volatile items such as food and energy, decreased for the first time since 2021 with a drop of 0.1% — only the second time the gauge has contracted over more than 15 years. Factory deflation extended into a 29th month.

“China’s economy still faces deflationary pressure,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. “Domestic demand remains weak.”

China’s Consumer Prices Dropped in February

The statistics bureau said a key factor for the decline in inflation was the effect of a high base from a year earlier, created by elevated prices caused by spending during the Lunar New Year. The festival is a moving holiday that fell entirely in February 2024 but ran from Jan. 28 to Feb. 4 this year.

When accounting for seasonality, the statistics bureau estimates consumer inflation actually rose 0.1% from a year earlier in February, according to a statement published on Sunday. Goldman economists estimate the earlier holiday brought year-over-year CPI inflation down by 0.7 percentage point in February.

A clearer read on China’s inflation trajectory will emerge in March, as investors look for signs that the government’s stimulus is translating into stronger domestic demand. The country is on track for the longest streak of economy-wide price declines since the 1960s as a result of weak spending, while the property crash has yet to bottom out.

China has set its inflation target at the lowest level in over 20 years and now aims to bring consumer-price growth to around 2% in 2025 — down from the previous 3% target. It’s a signal top leaders are finally recognizing the deflationary pressures weighing on the world’s second-largest economy, with consumer inflation stuck at just 0.2% for the past two years.

What Bloomberg Economics Says…

“China’s weaker-than-expected February price data highlight slack demand and an urgent need for policymakers to deliver on pledged stimulus quickly. Without a powerful boost from fiscal and monetary policies, deflationary pressures will continue to weigh on the economy.”

— David Qu, economist. For full analysis, click here

Urgency has grown for the government to reflate the economy. At the annual parliament session Wednesday, China announced an ambitious economic growth goal of about 5% for 2025, despite the threat of an intensifying trade war with the US. Beijing also laid out plans to boost fiscal stimulus and domestic consumption.

Still, Bloomberg’s calculations based on China’s deficit estimates show nominal economic growth is expected to be around 5% this year, matching Beijing’s inflation-adjusted target. The outlook suggests officials anticipate little to no overall inflation.