China can’t shake its deflation habit

According to the National Bureau of Statistics, producer prices fell 5.9% in the year to September, their fastest rate since the global financial crisis in 2009, a rate of decline unchanged from August, and the 43rd straight month of decline. Consumer inflation also came in lower than expected at 1.6%, down from an annual rate of 2% in August.

Sanjiv Shah, chief investment officer at Sun Global Investments in London noted that the figures seem to validate market fears about the strength of the world economy. Both the price data today, and trade figures released yesterday that showed a sharp drop in imports, “point to weakness,” he argued.

Weakness in China not only damps the profits of companies exporting to the world’s second-largest economy, it also raises the temptation for China to export its way out of crisis again, something that would spread deflationary pressure around the world. Inflation in the Eurozone and U.K. Has is already back below zero. That’s a worrying sign for central bankers and markets, even if much of the recent decline is due to the renewed fall in oil prices in the summer.

Chinese and Japanese stock markets fell over 1% in response to the news, and the weakness has also spread further west: the Euro Stoxx 50 is down by 0.6% at lunchtime in Europe.

Analysts are now forecasting that growth in the third quarter of this year slowed to 6.8%, down from 7% in the second quarter and below the government’s target. The government is set to release its data next week.

Sun’s Shah said the figures will add to fears that “the Federal Reserve may have missed their opportunity to raise interest rates and more signs of a global slowdown may push them to a no-action stance for a long time.”

The Fed unsettled markets badly last month by backing away from its first rate hike in nine years, a move that many interpreted as a sign that the global economy is in worse shape than thought.