The consumer price index fell 0.5% last month from a year earlier, the national statistics bureau said in a statement Saturday. That’s the biggest drop since November 2020 and is weaker than the 0.2% drop projected by economists in a Bloomberg survey.

Producer prices declined 3%, compared with a forecast of a 2.8% fall. Factory-gate costs have been mired in deflation territory for 14 consecutive months.

China has struggled with falling prices much of this year, contrasting with many other parts of the world where central banks are focused on taming inflation instead. Bloomberg Economics expects deflationary risks to persist into 2024, as there aren’t enough catalysts to counter the housing slump, which has suppressed demand and prices.

Deflationary pressures have increased because of weak domestic demand, said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “This highlights the importance of more supportive fiscal policy.”

Deflation is dangerous for China because it can lead to a downward spiral of economic activity. Consumers may hold off purchases on expectations prices will keep falling, further weighing on overall consumption. Businesses might lower production and investment due to uncertain future demand.

Deflation can also make monetary policies to stimulate the economy less effective, as declining prices lower corporate income and make it more difficult for companies to service their debt. The central bank has sought to downplay the risks of deflation this year, with an adviser to the People’s Bank of China saying last month that those pressures are “temporary.”

Stronger Support

Beijing recently turned to fiscal policy to spur domestic demand, unexpectedly increasing its budget deficit and encouraging banks to help local governments refinance debt at lower interest rates to help increase their spending capacity.

There are indications that fiscal support will strengthen in the coming year to help the recovery: China’s top leaders on Friday announced such policies will be stepped up “appropriately” and emphasized the importance of economic “progress,” suggesting next year’s growth goal may be ambitious.

But it has been difficult for additional government spending to offset declines in demand coming from other sectors. The value of new home sales among China’s 100 biggest developers fell 29.6% on-year in November.

Exports also remain weak, rising just 0.5% last month, far below the pace seen in recent years. Economists have said it’s too early to call a bottom for growth, with some predicting further pressure on the economy in 2024 because of ongoing challenges from the property sector.

The weak CPI figures have been partly due to slumping pork prices. An ample supply of hogs and sluggish consumption have weighed on the market, prompting the government to take steps to support prices. The meat has a large share in China’s CPI basket due to its popularity among local diners.

The so-called core CPI, which strips out volatile food and energy costs, rose 0.6% on year in November, repeating the previous month’s performance.

China has set an annual inflation target of around 3% this year, which it is nearly certain to miss. Economists have mixed views on the outlook for 2024, with some arguing that consumer prices could grow at a pace of around 1% as sentiment improves, and others arguing deflation will persist into the first half.

Proactive fiscal stimulus will be a vital part of China’s policy objectives next year, according to Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. The measures will “have to strike a balance between juicing investment and consumption, and capping debt risks of local governments.”

— With assistance from Tom Hancock, Jasmine Ng, Jill Disis, and Yujing Liu