The good news: Consumer inflation in China reached its highest level in nearly three years in December, according to the National Bureau of Statistics. Prices rose 0.8% YoY, the most since February 2023.

The bad news: The uptick in CPI was largely due to a spike in fresh vegetable prices rather than recovering demand. That fact was underscored by China’s producer price index, which extended its deflationary streak to 39 months in December.

What’s being done about it: Beijing pledged to take more aggressive action to spur consumer spending, although so far concrete measures have been limited. The government extended a trade-in program for autos, appliances, and consumer electronics that helped boost short-term sales but is unlikely to deliver long-term growth.

However, the government is taking a more assertive approach on the price wars raging across China’s retail sector.

• New guidelines prevent ecommerce platforms like Alibaba’s Taobao and Tmall and Pinduoduo from forcing merchants to guarantee the lowest prices on their marketplaces, as well as from using tactics like traffic throttling and search ranking demotion to pressure sellers into cutting prices.
• China’s State Council also announced an investigation into the fierce competition in the food delivery sector among Meituan, JD.com, and Alibaba, which is eroding profits and contributing to the country’s deflation problem.

Implications for retailers: China’s crackdown on pricing practices doesn’t solve the country’s fundamental economic challenge: Consumers don’t feel secure enough to spend. In the absence of wide-ranging subsidies to support consumption and efforts to stabilize the property market, merchants will likely still need to lower prices to get cautious shoppers to open their wallets.

Retailers must therefore tread a cautious path, keeping prices low enough to entice shoppers while avoiding Beijing’s crosshairs.

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