The consumer price index (CPI) reading for September is not good news for the China economy. The rate of 0.4% year-on-year, down from 0.6% in August, shows that prices are moving in the wrong direction and that deflation risks becoming entrenched in the wider economy.

There are several causes for concern in the latest data dump. First and foremost, the 0.4% reading does not reflect the true extent of the deflation, as it includes more volatile aspects like food and fuel prices that are providing a temporary boost to prices (floods and other extreme weather have been driving up produce prices through the summer). Core inflation, which excludes food and fuel, was just 0.1% in September, unchanged from the month previous.