China’s Economy enters into Deflation for the First Time in More Than Two Years

China’s economy is experiencing deflation as consumer prices have dropped for the first time in over two years, indicating reduced demand. In July, the consumer price index (CPI) fell by 0.3% compared to the previous year, marking the first decrease since February 2021, as per the reports of China’s National Bureau of Statistics on Wednesday, August 9. Costs for food, transportation, and household items went down, with pork prices declining by 26% and vegetable prices by 1.5%.

The producer price index (PPI), which gauges factory prices, fell by 4.4% in July compared to the previous year. This marks the 10th consecutive decrease in PPI and the first instance since November 2020 where consumer and producer prices have declined in the same month. This indicates a growing presence of deflation in China, raising worries about a prolonged economic slowdown.

China’s economy saw minimal growth from April to June compared to the previous quarter, as the initial boost from easing pandemic restrictions last year dwindled. The country is also grappling with a prolonged slowdown in its real estate industry and sluggish trade.

China is the first G20 economy to show a year-on-year drop in consumer prices since Japan’s negative CPI result in August 2021. This decline raises worries about the impact on trade partners’ businesses.

The information follows a recent report indicating a drop in both exports and imports in July, along with numerous accounts of financial issues in China’s large real estate industry. Concerned individuals and businesses are holding onto cash instead of spending or investing, even though interest rates are lower.
Beijing aims for consumer inflation to reach about 3% this year, up from the 2% seen in 2022. For the time being, officials are minimizing worries about deflation.

Xia Chun, a chief economist at Yintech Investment holding in Hong Kong, predicts that China’s deflation will likely continue for six to twelve months, but it won’t be as prolonged as Japan’s two-decade-long period of stagnant prices.

What is Deflation?

Deflation is a widespread decrease in prices for things we buy and use. It usually happens when there’s less money and credit available in the economy. In deflation, the value of money goes up over time.

Although Deflation is advantageous for consumers as they can buy a large number of products and services using the same amount of money over time, But economists have been wary of Deflation because of its adverse impact on the economy.

In China’s case, the main reason behind the deflation is the continuous decrease in consumer prices thanks to reduced demand.

Also Read: Newly Emerging Covid Variant EG.5 Gains Traction in the US as Per CDC Data