The government work report set a main expected target for this year’s development, proposing an increase in the consumer price index (CPI) of around 2%. For many years, this target has been “around 3%”. With this year’s target being lowered compared to previous years, how should this adjustment be viewed?
— Netizen via People’s Daily Online 13****2
To answer this question, we first need to understand the significance of the Consumer Price Index (CPI).
Prices are connected to both the macroeconomy and the lives of millions of households. It serves as a “barometer” reflecting supply and demand, a “weather vane” guiding resource allocation, and a “thermometer” measuring the well-being of people’s lives.
Because of its widespread implications and broad influence, the CPI, which reflects the price level, needs to maintain a sense of “balance.” Both excessively high and excessively low levels are undesirable. A continuous sharp increase could trigger inflation, raise the cost of living, weaken consumer spending power, and hinder economic growth. On the other hand, a prolonged decline could affect real interest rates, limit corporate investment willingness, and hinder employment and income growth. A more ideal and healthier state is a “moderate increase.”
Looking at the performance of China’s CPI in recent years, from 2021 to 2024, the CPI annual growth rates were 0.9%, 2%, 0.2%, and 0.2%, respectively. Overall, prices have remained stable.
There is a positive side to this.
In recent years, thanks to China's strong manufacturing base, stable grain production, and prudent monetary policy without excessive easing, we have avoided the high inflation that some developed economies are currently facing. Particularly, the prices of daily necessities such as rice, cooking oil, salt, meat, dairy, and poultry have remained stable, preventing the cost of living from being “discounted” due to rising prices.
However, we must also acknowledge the issue of generally low price levels.
The target for the CPI growth rate in 2024 is “around 3%,” but the actual growth is 0.2%. The causes are multifaceted: globally, the world economy’s weak growth momentum has led to a general downward fluctuation in international commodity prices; in terms of supply, some industries and sectors are experiencing a temporary oversupply, with some companies “cutting prices to gain market share” and even engaging in “involutionary” competition; in terms of demand, consumer ability and willingness still need to be further improved; in key areas, the real estate market is undergoing a deep adjustment. These issues represent the downward pressure and are also the root cause of the sustained low price levels.
Based on the current reality of downward pressure on prices and in line with the overall goals of macroeconomic policy, this year’s government work report sets a CPI growth target of “around 2%,” reflecting a practical, realistic, and proactive approach. This pragmatic goal can not only ensure basic livelihoods but also stabilize expectations, promote investment, and improve the economic cycle, driving sustained economic recovery and improvement.
With prices operating within a reasonable range, we have the conditions, capabilities, and foundation to achieve this.
First, let’s look at the strength of the policy. By studying the government work report, it is clear that each measure is well-targeted and robust. For example, “vigorously boosting consumption” and “expanding domestic demand in all directions” will help resolve the supply-demand imbalance. Additionally, “comprehensive rectification of ‘involutionary’ competition” will ensure that prices better reflect quality, preventing “bad money from driving out good money.” Moreover, “stabilizing the real estate and stock markets” can release wealth effects and further boost consumption. Furthermore, macroeconomic policies such as fiscal and monetary measures are strengthening counter-cyclical adjustments, which will improve the supply-demand relationship and provide support for a moderate price rebound.
Next, take a look at the market conditions. Since the beginning of the year, there have been positive signs in price movements. In January, the CPI increased by 0.7% month-on-month, compared to a flat rate in December 2024, and the year-on-year growth expanded from 0.1% in December 2024 to 0.5%. In February, due to factors such as the Chinese New Year holiday falling in a different month, prices slightly decreased. However, excluding the effects of the holiday, the CPI increased by 0.1% year-on-year, indicating that the moderate price rebound trend has not changed. Additionally, in February, the manufacturing PMI rose to 50.2%, returning to the expansion zone, indicating a clear improvement in production and demand. The non-manufacturing PMI and composite PMI indices also remained in the expansion zone, reflecting a recovery in economic prosperity, which suggests that overall demand will gradually improve.
Overall, boosting consumption is the key to smooth economic circulation and the guarantee for a moderate price rebound. Its “logical chain” is: boosting consumption, optimizing supply — a more balanced supply-demand relationship — reasonable price rebound — improved corporate profits and enhanced efficiency — creating more jobs and helping residents increase income — increased consumption capacity — further expanding consumption. With high-quality supply, vast demand, and abundant policy tools, we have enough capability and conditions to break through the bottlenecks in the economic circulation, maintain balance between supply and demand, and achieve an optimal combination of steady growth, stable employment, and a reasonable price rebound.
When ordinary people can consume, dare to consume, and are willing to consume, when businesses have reasonable profits, employment and income are secured, and residents’ lives have quality, this is the “healthy state” that China’s economy aims to achieve in the new year. Let us work together toward this goal.
