China's core inflation has dropped to its lowest level in over three years, sparking demands for increased measures to encourage household spending as weak demand threatens the annual growth target.

According to the National Bureau of Statistics, the consumer price index (CPI), excluding the fluctuating costs of food and energy, rose only 0.3% in August compared to the previous year, marking the smallest increase since March 2021.

The overall CPI increased by 0.6%, falling short of expectations despite being supported by higher food prices due to adverse weather conditions last month.

Combined, the figures further indicate weak consumer demand in the world’s second-largest economy, leading to calls for additional measures to prevent a negative cycle of falling corporate revenue, wages, and spending, Bloomberg reports.

“The deflationary pressure in China is getting more entrenched. This may well fuel a downward price-wage spiral which will require more radical policy response,” said Michelle Lam, Greater China economist at Societe Generale.

China’s CSI 300 Index deepened its early losses to end the morning session down 1.1% on Monday. The onshore benchmark is nearing a five-year low as pessimistic sentiment continues due to weak earnings and slow economic recovery.

Furthermore, the Yuan saw slight declines in both onshore and offshore markets. Meanwhile, the yield on China’s 10-year government bonds remained steady at 2.13%, near its record low.

China’s economy is grappling with its longest period of falling prices since 1999, as indicated by the gross domestic product deflator, which measures economy-wide price levels.

Weak consumer spending and investment have triggered aggressive price competition in sectors such as electric vehicles and solar energy.

This situation is undermining China’s prospects of reaching its growth target of around 5%, as consumers postpone purchases and businesses cut wages, the Bloomberg report goes on to add.