China's economy facing mounting crisis as prices plunge

The official figure was below economists’ predictions of a 0.2 per cent annual rise in CPI.

Factory gate prices are also dropping - suggesting consumer prices may soon go into reverse.

Producer prices also decreased by 5.4 per cent in June, which is the ninth consecutive monthly fall and the sharpest drop since the end of 2015.

According to analysts at Goldman Sachs, China is likely to dip into deflation as soon as this month.

It will be good news for households in the short term as it bumps up consumer buying power and encourages interest rates to remain low.

However, longer periods of falling prices can cause pay to become stagnate and companies are forced to cut jobs to cope with stagnating demand.

China, which is the world’s second biggest economy, has struggled to recover from Covid policies that were only removed at the end of last year.

Youth unemployment in the country stands at 20.8 per cent and cautious families have been stockpiling cash, rather than spending.

“Insipid consumer inflation is an indication of the soggy consumer spending recovery, especially for goods, as well as excess production capacity," Duncan Wrigley, chief China economist at Pantheon Macroeconomics told The Telegraph.

Predictions from economists suggest the People’s Bank of China (PBOC) will respond to the country’s outlook with interest rate cuts to encourage demand.

In a client note, analysts at Barclays said: “We think the more challenging deflation environment and sharp slowdown in growth momentum support our view that the PBOC has entered a rate-cutting cycle.”

Some experts believe China will have to replace rate cuts with tax reductions or increased spending to boost activity.

However, Wrigley said: “So far the public information points towards a targeted, limited stimulus, which will largely be funnelled into support for industry, technology upgrades and private firms, rather than a significant consumer handout.”