The Chinese economy slipped into deflation last month, with economic indicators showing that improvements are a long way off.
- On Wednesday, China’s National Bureau of Statistics states that a drop in food prices and reduced demand from Western importers has contributed to deflation.
- The Consumer Price Index dropped 0.3% in the past 12 months, while producer prices contracted 4.4%, marking ten consecutive months of decline.
- Consumer and producer prices have not been mutually deflationary since 2009 during the global financial crisis.
- Bureau statistician Dong Lijuan claims that consumer prices will likely improve later this year, as the ongoing comparatively high base of prices from last year reflects temporary trends.
- This marks the first major fall in consumer prices in two years.
Why It’s Important
As the world’s second-largest economy slowly moves away from its late COVID-era policies, China remains one of the only major countries without a runaway inflation crisis. As The Wall Street Journal notes, the absence of inflation marks a growing trade imbalance for China as manufacturers are trapped with a backlog of supply, with Western consumers cooling imports.
With many factors at play, the situation speaks poorly for the immediate future of the Chinese economy, as multiple market forces trend negative and stand to punch manufacturers and workers for the foreseeable future—with youth unemployment rising, the housing market tensing, and falling prices on goods, including steel, coal, food, and appliances.
Should these trends become entrenched, demand for Chinese manufactured goods could decrease and exacerbate the country’s considerable debt burdens, creating a vicious cycle that damages the economy and average workers for years.
As we previously reported, China has faced difficult economic growth for months since the end of the ZERO COVID Policy. Global trade has begun to shift manufacturing to countries like Mexico and India as public opinion shifts from China to the U.S. The Bureau previously reported 0% inflation in June, foreshadowing the current crisis.
“The reality looks increasingly grim. The government’s approach of downplaying the risks of deflation and stalling growth could backfire and make it even harder to pull the economy out of its downward spiral,” says Cornell University economist Eswar Prasad.
“China is in deflation for sure. The question is how long. It’s up to the policymakers—will they react with coordinated fiscal and monetary easing,” says Morgan Stanley economist Robin Xing.