What’s happened?

The consumer price index (CPI) slumped to a year-on-year decline of 0.5% in November, according to data reported by the National Bureau of Statistics on December 9th. The producer price index fell by 3% year on year, with contraction continuing to gather pace. Although we expect some drag factors to fade in 2024, disinflation is likely to persist. 

Why does it matter?

The services sector, which comprises approximately half of the CPI basket, will contribute only modestly to inflation next year. After a rise in early 2023 on the back of a travel boom, services prices began to fall in September, with the month-on-month change deteriorating further to ‑0.4% in November. As pent‑up demand subsides and supply constraints ease (through, for example, an increase in international flights next year), sectors such as travel, catering and hotel services are unlikely to bolster headline inflation as they have done this year.

Prices related to housing are under pressure as well, having stagnated in November. The housing supply for sale and rental keeps growing. Media reports suggest that existing home listings have soared this year across China, and this has translated in part into rental supply because of a lack of willing buyers. However, this will not be matched by a concomitant rise in demand, as EIU expects youth unemployment to stay elevated next year amid a dim outlook for recruitment.

The outlook for the goods CPI is similarly subdued. Despite disruption from El Niño, warmer weather in China has in fact led to increased agricultural production, which further dampened already-low food prices. Meanwhile, the price of pork, one of the heavyweights in the CPI basket, will be constrained by a supply surplus. The high level of swine stock is likely to persist into the third quarter of 2024, albeit not as pronounced as this year, while our bearish outlook for soybean—an important foodstuff for animals—will suppress the cost of pig farming. 

Moreover, our baseline projection indicates that oil prices will rise by just 1.3% in 2024, implying an insignificant effect on China’s CPI next year. A continued slump in the property sector, coupled with conservative income expectations, is expected to constrain the consumption of discretionary and durable goods.

What next?

Entrenched disinflation raises real financing costs and hampers spending and private investment, further restricting the economy. We will cut our forecast for CPI growth in 2024 to below 1%, from 2% at present.

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