China’s CPI enters negative zone signalling deflation

China's consumer price index turned negative in February for the first time in six years, signalling deflation as the world's third largest economy tries to cope with the global economic turmoil.

The country's National Bureau of Statistics today said that the consumer price index, which is the main indicator of inflation, was down 1.6 per cent in February from a year earlier, the first fall since December 2002.

It said that the drop was due to lower prices of food items and motor fuels, a major component of the index while the cost of manufactured products has been falling consistently since August, which finally fell by 4.5 per cent last month and added that the last time the producers price index fell by this volume was in March 1999.

According to analysts, the fall in CPI and PPI indexes, indicates that China has plunged into a deflationary period. In January, consumer inflation dropped to a two-and-a-half year low to just 1 per cent, according to data issued by the National Bureau of Statistics, indicating the world's third-largest economy is showing signs of weakening with slowdown in export and industrial growth indicating signs of deflation (See: China's January inflation down to 1 per cent; warning signs of deflation).

Premier Wen Jiabao had said in his annual speech to China's parliament last week, that the country's economy will grow at a pace of 8 per cent while warning of the trend towards global deflation.

As with the global consumer trend, Chinese consumers are also delaying their purchases on the belief that prices will fall still further in future thereby putting even more downward pressure on economic growth and prices.

The problem currently with China, experts say is that the $586 billion stimulus package announced in early November to boost its economy and stimulate growth (See: China pumps $586 billion to bolster economy)  has still to have any impact on the economy.

With prices for most consumer and food items low, it may boost spending temporarily and the government may step in to raise prices on certain essentials in a controlled fashion.

The government has said that since it removed quotas on lending money by financial institutions, Chinese banks have loaned out a record 1.6 trillion yuan in January, which was double the amount compared to a year earlier.