As China’s economy delivered its best performance since the coronavirus pandemic emerged, one metric has remained resolutely downbeat.

Industrial production has powered to its highest rate of growth in 2020, surpassing most of 2019. Consumption has recovered and exports are booming, rising by 21 per cent in November. But the same month, the country’s consumer price index fell into negative territory for the first time in over a decade.

The headline rate of minus 0.5 per cent was mainly driven by pork, a crucial component in the basket of goods and services used to determine the price level. Pork prices rose sharply last year as African swine fever swept through China’s herds, but have recently begun to decline, dragging overall price growth into negative territory.

But even when food and energy are stripped out, China’s core inflation has remained at 0.5 per cent for the past five months — its lowest level since 2010, and a puzzle given that China is experiencing the world’s most resilient rebound from the coronavirus pandemic.

The persistent weakness of Chinese prices indicates subdued household demand and poses a challenge for the People’s Bank of China as it tries to manage the recovery in other areas of the economy, analysts said.

“With this sort of strength of economic activity, there should be more price pressure,” said Dariusz Kowalczyk, an economist at Crédit Agricole, who pointed out that industry is growing faster than it was before the pandemic.

Line chart of Annual % change showing Chinese inflation points to sluggish consumer demand

Although retail sales have been growing year-on-year since August, rising by 5 per cent last month, the subdued inflation data suggest households have a limited appetite to spend.

“We think low inflation is not only because of low food and oil prices, but because there is still some weakness on the demand side,” said Jingyang Chen, an economist at HSBC. She added that China “is still in the middle of an uphill battle to achieve a full recovery in domestic demand”.

Unlike many western economies, China has taken limited measures to prop up household spending, and has instead focused on supply-side measures to boost its economy combined with a strict approach to virus prevention that limited new reported cases to a trickle.

“[The government] orchestrated and managed a rapid recovery of industrial production, and as a result we had this overhang of supply not matched by demand, so not surprisingly, prices have to be low,” Mr Kowalczyk said.

There are some caveats to the price data. Interpretation is more difficult than usual because of changes in household behaviour during the pandemic, particularly regarding the basket of goods and services they consume. Spending on services such as travel and tourism has risen recently, for example, but remains depressed compared with last year.

And not all prices are weak.

China’s producer price index, which measures factory gate prices, has been in negative territory since February on an annual basis. But it rose month-on-month in November, suggesting the contraction is easing thanks to export growth, which relies on consumption in the west, where government support has been stronger.

China’s stock market has boomed this year and the prices of new homes have risen sharply. Concerns over leverage have already surfaced in the property sector, where the government has taken measures to constrain borrowing. These are beginning to have an effect: in November, new home prices rose 4 per cent year on year across major cities — the slowest rate in nearly four years. China’s CPI measure does not directly include house purchases but does partly incorporate the cost of renting.

Another bright spot is China’s improving labour market, which could help revive inflation in the coming months. In November, the unemployment rate fell to the same level it had been in December 2019, before the pandemic struck. That could drive a recovery in consumer confidence and consumption, supporting prices.

But Ms Chen said income growth remained uneven: “A lot of people only focus on average disposable income growth in China, but if you take a look at migrant workers’ [income] growth they are still lagging behind.”

The country’s millions of migrant workers, who are not fully reflected in official unemployment data, were hit hard by travel restrictions and lockdown measures earlier this year.

Negative inflation exerts pressure on corporates and households by increasing real interest rates, as well as threatening to undermine profitability. And while many expect rate hikes to begin next year, some suggest that stagnating prices could put pressure on the PBoC to hold or even cut rates.

Haibin Zhu, chief China economist at JPMorgan, argued in a December report that “macro and inflation dynamics are pointing in different directions” and that the PBoC is likely to cut rates in 2021. He says that financial markets have focused “too much on the strong data”.

But the central bank would have to tread carefully in considering whether to loosen monetary policy in the midst of a strong recovery.

“Cutting the rates may send a misleading message of policy easing,” said Mr Zhu. “That’s something the PBoC doesn’t want to miscommunicate to the market.”

Additional reporting by Wang Xueqiao in Shanghai