China faces deepening deflation as consumer prices fall for third month due to US trade strain

China’s economy is showing a fresh sign of deflationary strain. According to data from the National Bureau of Statistics, as reported by Reuters, consumer prices fell for a third consecutive month in April. This highlights growing economic uncertainty as the US-China trade war escalates.

The Consumer Price Index (CPI) dropped 0.1 per cent year-on-year, mirroring the decline in March and aligning with economists’ forecasts. On a monthly basis, CPI edged up slightly by 0.1 per cent, reversing a 0.4 per cent fall in the previous month. Meanwhile, the Producer Price Index (PPI), which tracks the cost of goods at the factory gate, fell 2.7 per cent year-on-year, deepening from a 2.5 per cent decline in March. The continued drop in prices signals weak domestic demand and adds to the fear that the world’s second-largest economy is sliding deeper into deflation.

This economic fragility of China comes at a time when Beijing is facing intensifying trade tensions with Washington.

On May 9, 2025, just a day before the Geneva summit, US President Donald Trump reaffirmed his administration’s commitment to maintaining a baseline 10 per cent tariff on imports, even after trade deals are finalised. He also suggested the possibility of increasing tariffs on Chinese goods to 80 per cent, a reduction from the previously imposed 145 per cent levies. These statements set the tone for the high-stakes trade talks scheduled for May 10 in Geneva between US Treasury Secretary Scott Bessent, Chief Trade Negotiator Jamieson Greer, and China’s Vice Premier He Lifeng. The discussions mark the first formal engagement between the two nations since the escalation of the tariff war earlier this year.

The backdrop to these talks is a series of escalating trade measures. In April 2025, President Trump imposed a 145 per cent tariff on Chinese imports, citing concerns over trade imbalances and national security. China swiftly retaliated with a 125 per cent tariff on US goods, leading to a significant downturn in bilateral trade. Despite the tensions, both countries have expressed a cautious willingness to return to the negotiating table, with China emphasising the need for “equal consultation” and mutual respect in resolving trade disputes.

The ongoing trade tensions have had a tangible impact on China’s economy. The services sector, which makes up a significant portion of the country’s GDP, is showing signs of slowdown. According to a Reuters report published on May 7, China’s Caixin/S&P Global Services Purchasing Managers’ Index (PMI)  slipped to 50.7 in April from 51.9 in March, while the official services PMI dipped to 50.1, just above the contraction line. Meanwhile, exports to the US fell sharply, dropping 17.6 per cent month-on-month from $40.1 billion in March to $33.0 billion in April, marking the lowest level in five years. In response, the People’s Bank of China (PBOC) announced a set of monetary easing measures by cutting the seven-day reverse repo rate by 10 basis points to 1.40 per cent and lowering the reserve requirement ratio by 50 basis points, expected to inject about 1 trillion yuan ($138 billion) into the economy.