Chinese consumer price index inflation grew less than expected in January as the new year holiday spurred limited increases in spending, while a sustained contraction in factory gate inflation eased slightly.

CPI inflation rose 0.3% month-on-month in January, data from the National Bureau of Statistics showed. The reading was weaker than expectations for growth of 0.4%, but improved from the 0.1% seen in December.

On a yearly basis, CPI inflation shrank 0.8% in January, much worse than expectations for a drop of 0.5% and the prior month’s reading of 0.3%.

The weak readings came even as the new year holiday spurred some increased consumer spending, particularly on travel and shopping. The People’s Bank of China also further loosened liquidity conditions in the month.

But consumer inflation remained well within sight of deflationary territory after having contracted for four of the past 12 months. Consumer sentiment in China remained largely dismal amid persistent concerns over a sluggish economic recovery.

Producer price index (PPI) inflation reflected continued weakness in business activity, albeit with some improvement. PPI inflation fell 2.5% year-on-year in January, beating estimates for a drop of 2.6% and improving from the 2.7% decline seen in December.

But PPI inflation clocked a 16th consecutive month of contraction.

Thursday’s figure was largely telegraphed by a series of weak purchasing managers index readings for January, which showed little improvement in business activity. Official manufacturing PMIs showed China’s factory activity remained in contraction for a fourth straight month in January.

While private surveys showed some green shoots in the sector, Chinese manufacturing activity has remained largely under pressure from weak foreign and domestic demand, and has struggled to pick up from COVID-era lulls. Sustained weakness in the country’s biggest economic engines has now spilled over into other sectors, presenting a strained outlook for the Chinese economy.

A post-COVID economic recovery largely failed to materialize in 2023, casting doubts over just how much resilience the world’s second-largest economy still had after three years of lockdowns.

Thursday’s reading highlights the need for more fiscal stimulus measures from Beijing, which investors have been clamoring for amid worsening economic conditions.

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