China’s Producer Prices See Steepest Drop in Nearly Two Years

China’s producer prices fell sharply in June, dropping 3.6 percent from a year earlier, the largest decline since July 2023. The latest figures underscore the impact of deepening price competition across industries, as weak consumer demand continues to weigh on the economy.

Meanwhile, consumer prices edged up just 0.1 percent in June, according to data released Wednesday by the National Bureau of Statistics. This modest increase ended a four-month stretch of declines, but still pointed to fragile underlying demand. Economists had forecast a flat reading in a Reuters poll.

Core inflation, which excludes food and energy prices, rose 0.7 percent from a year earlier—its fastest pace in over a year.

The producer price index fell more than expected. Analysts had projected a 3.2 percent decline, but the actual drop of 3.6 percent marked a continuation of the deflationary trend that has persisted since September 2022.

China’s benchmark CSI 300 index rose slightly by 0.19 percent following the data release.

Some analysts cautioned against premature optimism. “It is too early to call the end of deflation,” said the chief economist of a private asset management firm, citing ongoing weakness in the property sector and the early stage of China’s campaign against excessive competition, sometimes referred to as “neijuan.”

Last week, China’s top policymakers, during an economic meeting led by President Xi Jinping, warned against destructive price-cutting practices by domestic companies. Officials noted that aggressive discounting has failed to revive consumption while hurting business profitability. Industrial firms’ profits declined by 9.1 percent in May compared to the previous year, marking the steepest drop since October.

A state-backed publication reported that businesses should focus on raising product quality and support the gradual elimination of outdated capacity.

The slight uptick in consumer prices was supported by a recent trade-in program offering subsidies for household appliances, electronics and electric vehicles. However, this effect may fade later this year if excess supply remains unresolved.

Experts warned that overcapacity continues to plague manufacturers, and price wars are likely to persist in the absence of substantial policy support. “Without a strong stimulus, it is difficult to escape the ongoing deflationary cycle,” said one economist.

Policymakers appear reluctant to launch new stimulus measures while exports are still showing some strength. Chinese exports rose 4.8 percent in May and 8.1 percent in April, driven largely by shipments to Southeast Asia, which helped offset reduced trade with the United States amid ongoing tariff uncertainty.