The news: China’s consumer price index (CPI) fell for the third straight month in April, a sign the government’s stimulus efforts are failing to reassure consumers worried about the trade war’s effect on an already sluggish economy.

• CPI declined 0.1% YoY, per the National Bureau of Statistics, in line with the previous month’s decline.
• Factory-gate deflation fell by 2.7%, the steepest drop in six months.

Why it matters: The data will not be reassuring for Beijing, which is counting on domestic consumption to help soften tariffs’ blow on China’s export-oriented economy. Persistently weak demand could force the government to rethink its efforts to encourage exporters to pivot to the domestic market, especially since such a move risks making China’s existing price wars even more competitive and, consequently, exacerbating the deflationary spiral.

Our take: China’s deflation problem shows how vulnerable it is to a prolonged trade war. While the country’s largest retailers have promised billions of yuan in support to exporters, that’s hardly a guarantee of survival, given the extreme pressure these companies are under to save their businesses from the impact of tariffs.

While the temporary tariff truce should give companies some relief by unfreezing orders from American customers, it will take considerably more robust stimulus measures to restore consumers’ confidence and get them spending.

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