The weaker-than-expected headline numbers are likely to add fuel to the debate over whether China faces deflation risks.
In our view, the deflation argument is overblown and base effects make January’s data look worse than it is. Sequential data paints a more optimistic picture. On a month-on-month basis, the headline CPI rose 0.3%, the food CPI rose 0.4%, and the non-food CPI rose 0.2%. While they are a far cry from the above-target inflation levels seen in many other economies, these figures do not imply that China is trapped in a deflationary spiral.
Furthermore, the pork cycle in China also indicates that the drag on pork prices will also disappear in the coming months. While still a major drag on January data, pork price inflation has actually increased over the past two months, with December 2023’s month-over-month change in hog stock being the biggest drop. since March 2022. With demand expected for the Lunar New Year holiday in February, this could return to positive growth in the post of next month.
As such, considering the more favorable base effects for the February data, we see a high probability that the January data marks the lowest point for year-over-year inflation in the current cycle.