China has officially slipped into deflation for the first time in two years as the country struggles with post-pandemic recovery, data reflected on Wednesday.

The consumer price index (CPI), the main gauge of inflation, dropped 0.3% year-on-year in July, after flatlining in June, said the National Bureau of Statistics (NBS). 

The product price index (PPI) plunged for the tenth consecutive month down 4.4% from a year earlier after a 5.4% drop in June.

The deflation was reported a day after trade figures showed how Chinese exports and imports plunged in July.

Domestic demand on the wane

Deflation refers to the prices of goods and services falling, caused by reduced consumption. This could be due to weak spending power and also because the trend of falling prices encourages consumers to delay spending in hopes of further cuts.

While cheaper goods may appear beneficial to purchasing power, the delay in buying amid the cuts poses a threat to the economy.

Reduced sales force companies to freeze hiring, law off workers and be strong armed into offering discounts.

Chinese leaders face an economic challenge

As domestic spending weakens, the economic boost which was briefly reported at the end of last year after the Chinese leadership lifted the Zero-COVID measures, has lost all momentum.

Imports into China shrunk by 12.4% in July for the ninth straight month, in a sign that domestic demand has sharply tumbled.

Chinese exports have been in constant decline since October and in July exports sank year-on-year by 14.5%, reporting one of the steepest drops in foreign sales.

The weakened international demand for Chinese goods can be attributed to the threat of recession in the United States and Europe, combined with persistent high inflation.

With youth unemployment at an all time high and a sluggish property sector, authorities are introducing multiple policy measures to deal with the catastrophic economy.

China's Politburo — the top decision-making institution for the Chinese Communist Party's Central Committee — promised change but also warned that it now faces "new difficulties and challenges" as well as "hidden dangers in key areas."

ns/jsi (Reuters, AFP)