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(Bloomberg) — China’s slide into deflation is proving hard for the world’s second-largest economy to arrest. Economy-wide prices last quarter marked their longest deflationary streak since the Asian Financial Crisis in the late 1990s. Weak demand looks set to keep weighing on growth in 2024, posing another challenge for policymakers.

Here’s a look at how China’s deflation breaks down, and when it might come to an end:

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1. How Does China Measure Deflation?

There are three main gauges. Most-cited is the consumer price index, which reflects changes across a range of goods and services and in December marked its longest streak of declines since 2009. The producer price index measures changes in industrial products sold by manufacturers and has been in contraction for more than a year. They’re both published by the statistics bureau.

The gross domestic product deflator is an unofficial gauge calculated using the difference between the economy’s nominal and inflation-adjusted growth. It provides a broader snapshot, and is currently at its longest deflationary streak in nearly a quarter century.

2. What’s Driving Consumer Deflation?

Falling food prices are the biggest contributor, according to a Bloomberg Economics analysis of the CPI. That index contracted for the third straight month in December, but food prices fell for the sixth consecutive month. Among food, the decline was particularly pronounced in pork prices, the most-consumed meat in China which plunged 26% last month.  

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3. How Worried Should We Be About Food?

Some factors behind food deflation are cyclical. Pork farmers, for example, will expand herds to capture higher prices, only for the market to sink as the extra supply overwhelms demand. Pork output hit a nine-year high in 2023. Another contributing factor: Covid disruptions in 2022 upended logistics and pushed up the cost of vegetables, fruit and eggs, resulting in a higher base of comparison that makes price falls this year seem particularly bad.

Even after accounting for that, demand for food looks weak — and that reflects a deeper problem in the economy. Families dealing with a gloomy jobs market and ailing property sector are tightening their purse strings. That led to piles of cabbages and radishes being unharvested or destroyed in key producing provinces in late 2023. 

Chinese families on average allocated about 30% of their total expenditure to food, alcohol and tobacco last year, justifying its heavy weighting in the CPI basket. 

4. Where Else Are Prices Falling?

Transport products are another a drag on prices, with the category they sit in contributing negatively to the headline CPI for the 10th straight month in December. That’s mostly driven by falling prices in cars. An intense price war broke out among carmakers including Tesla Inc. and BYD Co. in 2023, with almost 900 car variants slashing prices by more than 5% at one point. 

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China’s GDP deflator was negative last year with manufacturing showing the biggest price drop at 3.2%, according to Bloomberg calculations. While consumers around the world may benefit from cheaper Chinese goods, it could raise trade tensions if domestic brands are being undercut.

5. Are There Any Bright Spots?

There are modest signs of inflation elsewhere, but prices are far short of pre-pandemic levels. Core CPI, which excludes food and energy, was stuck below 1% for most of last year — compared to 1.6% in 2019.

One sector to watch is services. That category, which includes things such as education, medical treatment and food delivery, climbed 1% in December, gifting a 0.4 percentage point lift to the CPI. But even those figures have undershot expectations for a strong post-Covid bounce back. 

That lackluster appetite is partly because households aren’t seeing a robust improvement in their disposable income growth. Some shoppers are now looking to “downgrade” their spending, as they search for cheaper alternatives. 

Tourism is the outlier. While it jumped 6.8% last month, after hitting a near 10-year high of 14.8% in August, it makes up a small part of the gauge as a subcategory of the “cultural, educational & sports articles” basket that represent 8.5% of the CPI.

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6. Will Deflation Ease in 2024?

Economists seem to think so. They’re forecasting China will average a 1.4% inflation rate in 2024, according to Bloomberg data. While that’s an improvement, it’s still on the low side and will likely be boosted by last year’s low base. 

Not everyone is so optimistic. Barclays PLC, UBS Group AG, Nomura Securities Co. are among those expecting it to remain below 1%, with the latter predicting the GDP deflator could again record a negative reading for full-year 2024. Bloomberg Economics sees a 50% chance that CPI deflation will persist at least through the first half of 2024.

Falling prices are “temporary,” according to the government. “There is the right foundation and conditions for the price of goods and services to rebound,” Kang Yi, head of the National Bureau of Statistics, said this week. “Given that the economy is improving, household income is growing steadily and the domestic demand is also set to expand.”

7. What Can China Do?

Efforts to stall deflation have faltered. Calls are growing for authorities to adopt more aggressive policies than rate cuts and trims to the amount of money banks must hold in reserve — both steps taken in 2023 to modest effect.

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Boosting consumer confidence would encourage spending. Core to that is stabilizing the property market, where a vast amount of household wealth is tied up. Authorities have provided cheaper long-term cash to policy banks to support lending to the housing sector, but more help is needed.  

As weak domestic demand continues, it will likely drag on imports from overseas and prevent domestic tourists from venturing abroad — making Chinese deflation a global concern.

“Consumption is lackluster, as households are worried about their income prospects,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “Don’t expect China to turnaround slowing global growth this year.”

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