China’s Inflation Problem? It Has None

SINGAPORE—As Western central banks continue to jack up interest rates in an effort to douse stubbornly high inflation, China faces a growing risk of the opposite problem—deflation.

Prices charged by Chinese factories tumbled in May at their steepest annual pace in seven years, while consumer prices barely budged, fresh signs of the challenges faced by the world’s second-largest economy both at home and abroad.

Economists say the absence of inflationary pressure means China could experience a spell of deflation—a widespread fall in prices—if the economy doesn’t pick up soon.

Persistent deflation tends to throttle growth and can be difficult to escape. While a prolonged period of falling prices probably isn’t in the cards, Chinese policy makers will nonetheless need to do more to stave off that risk and get the economy motoring again, economists say, perhaps by trimming interest rates, weakening the currency or offering cash or other spending inducements to households and businesses.

Ting Lu, chief China economist at Nomura in Hong Kong, said in a note to clients Friday that he expects local banks to cut key lending rates as soon as next week.

In remarks made at a meeting Wednesday and published by China’s central bank after the release of monthly inflation data Friday, central-bank Gov. Yi Gang said he expects consumer-price inflation to edge up in the second half of the year and exceed 1% in December. He said the People’s Bank of China would use its tools to support the economy and promote employment.

Falling prices in China aren’t necessarily bad news for the global economy, as lower costs to import Chinese goods should help bring down inflation rates that for many economies are still uncomfortably high.

“In a sense, China is already exporting deflation to the world,” said Carlos Casanova, senior Asia economist at Union Bancaire Privée in Hong Kong. That could help ease the pressure on the U.S. Federal Reserve and other central banks that are battling to bring down inflation, he said.

China’s producer prices—what companies charge at the factory gate—fell 4.6% from a year earlier in May, the weakest reading since early 2016 and the eighth straight month of declines.

Consumer prices rose just 0.2%, China’s National Bureau of Statistics said Friday, slightly higher than the 0.1% annual gain recorded in April but still well below the 3% ceiling for annual inflation set by the government and central bank.

In the U.S., consumer-price inflation in April slowed to a 4.9% annual rate, but that was still more than double the Federal Reserve’s 2% goal. In the 20 nations that use the euro, annual inflation was 6.1% in May.

After soaring last year in the wake of Russia’s invasion of Ukraine, prices of crude oil, food and some other commodities have pulled back, partly leading to China’s subdued inflation.

But also behind China’s predicament, which stands in contrast to the experience of most other economies as they emerged from the Covid-19 pandemic, is a shortfall in spending both domestically and from overseas.

Chinese factories are cutting prices because foreigners aren’t buying their goods with the same gusto as before central banks started ratcheting up borrowing costs. A hoped for consumer spending binge that was supposed to propel growth in China hasn’t materialised. Real estate is in the doldrums, crushing investment.

Western policy makers and economists are exploring whether fat corporate profit margins are stoking inflation in their economies. In China, industrial profits are sinking.

The inflation data adds to a string of disappointing signals on the strength of China’s recovery, which had been expected to power global growth this year after Beijing ditched its draconian Covid controls at the close of 2022.

Chinese exports fell in May from a year earlier, the first annual decline in overseas shipments in three months. Business surveys showed factory activity shrank in May and services-sector activity softened. More than a fifth of young people are unemployed.

Still, most economists think China will meet or exceed the government’s goal of growing the economy by 5% or more this year, given the weak base of comparison with 2022, when sporadic lockdowns in major cities hammered the economy.

Zichun Huang, China economist at Capital Economics, said she doesn’t think China will experience broad deflation and expects consumer price growth to pick up in the coming months thanks to support from policy makers and an improving labor market.

—Grace Zhu in Beijing contributed to this article.

First, the good news for office landlords: A post-Labor Day bump nudged return-to-office rates in mid-September to their highest level since the onset of the pandemic.

Now the bad: Office attendance in big cities is still barely half of what it was in 2019, and company get-tough measures are proving largely ineffective at boosting that rate much higher.

Indeed, a number of forces—from the prospect of more Covid-19 cases in the fall to a weakening economy—could push the return rate into reverse, property owners and city officials say.

More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show up. In August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules.

But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.

Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66%. But it was below 30% on Fridays. In New York, it ranges from about 25% to 65%, according to Kastle Systems, which tracks security-card swipes.

Overall, the average return rate in the 10 U.S. cities tracked by Kastle Systems matched the recent high of 50.4% of 2019 levels for the week ended Sept. 20, though it slid a little below half the following week.

The disappointing return rates are another blow to office owners who are struggling with vacancy rates near record highs. The national office average vacancy rose to 19.2% last quarter, just below the historical peak of 19.3% in 1991, according to Moody’s Analytics preliminary third-quarter data.

Business leaders in New York, Detroit, Seattle, Atlanta and Houston interviewed by The Wall Street Journal said they have seen only slight improvements in sidewalk activity and attendance in office buildings since Labor Day.

“It feels a little fuller but at the margins,” said Sandy Baruah, chief executive of the Detroit Regional Chamber, a business group.

Lax enforcement of return-to-office rules is one reason employees feel they can still work from home. At a roundtable business discussion in Houston last week, only one of the 12 companies that attended said it would enforce a return-to-office policy in performance reviews.

“It was clearly a minority opinion that the others shook their heads at,” said Kris Larson, chief executive of Central Houston Inc., a group that promotes business in the city and sponsored the meeting.

Making matters worse, business leaders and city officials say they see more forces at work that could slow the return to office than those that could accelerate it.

Covid-19 cases are up and will likely increase further in the fall and winter months. “If we have to go back to distancing and mask protocols, that really breaks the office culture,” said Kathryn Wylde, head of the business group Partnership for New York City.

Many cities are contending with an increase in homelessness and crime. San Francisco, Philadelphia and Washington, D.C., which are struggling with these problems, are among the lowest return-to-office cities in the Kastle System index.

About 90% of members surveyed by the Seattle Metropolitan Chamber of Commerce said that the city couldn’t recover until homelessness and public safety problems were addressed, said Rachel Smith, chief executive. That is taken into account as companies make decisions about returning to the office and how much space they need, she added.

Cuts in government services and transportation are also taking a toll. Wait times for buses run by Houston’s Park & Ride system, one of the most widely used commuter services, have increased partly because of labor shortages, according to Larson of Central Houston.

The commute “is the remaining most significant barrier” to improving return to office, Larson said.

Some landlords say that businesses will have more leverage in enforcing return-to-office mandates if the economy weakens. There are already signs of such a shift in cities that depend heavily on the technology sector, which has been seeing slowing growth and layoffs.

But a full-fledged recession could hurt office returns if it results in widespread layoffs. “Maybe you get some relief in more employees coming back,” said Dylan Burzinski, an analyst with real-estate analytics firm Green Street. “But if there are fewer of those employees, it’s still a net negative for office.”

The sluggish return-to-office rate is leading many city and business leaders to ask the federal government for help. A group from the Great Lakes Metro Chambers Coalition recently met with elected officials in Washington, D.C., lobbying for incentives for businesses that make commitments to U.S. downtowns.

Baruah, from the Detroit chamber, was among the group. He said the chances of such legislation being passed were low. “We might have to reach crisis proportions first,” he said. “But we’re trying to lay the groundwork now.”

China’s Inflation Problem? It Has None

Falling prices at the factory gate and subdued increases in the costs of consumer goods contrast with searing inflation in many countries

Office owners are struggling with near record-high vacancy rates