CPI, PPI fall, stoking deflationary fears

China’s consumer price index (CPI) fell for the first time since 2002 after commodity costs declined, Bloomberg reported. Consumer prices dropped 1.6% in February from a year earlier, the statistics bureau said today, after gaining 1% in January. The producer price index (PPI) fell 4.5%, the most in a decade. In addition to declines in metal and oil prices, China’s food prices, which make up nearly a third of the CPI, also cooled. The price declines increase the the risk that deflation in China will become entrenched, squeezing profit margins, putting downward pressure on wages and eroding demand. “The government has to make sure its stimulus package kicks in in time to boost domestic demand,” said Wang Tao, a Beijing-based economist at UBS AG. “Faltering global demand will result in exporters selling more goods back to China’s domestic market, adding deflationary pressure.”