Alarm bells sound for China as data indicates deflationary pressure

Deflation or inflation?

China’s consumer price index (CPI) fell by 0.3% in August from a year ago, while the producer price index (PPI) fell by 4.4% last month. This is the first time since February 2021 that the CPI has fallen, and the 10th consecutive month that the PPI has contracted. This indicates that China is experiencing deflation pressure as demand in the world’s second-largest economy weakens.

Factors that contribute to the deflation risk

  • A prolonged property market slump, which reduces investment and consumption.
  • A plunging demand for exports, due to the global economic slowdown and trade tensions with the United States.
  • A subdued consumer spending, due to the coronavirus pandemic and rising unemployment.

Deflation can have negative effects on the economy

  • Lowering profits and incomes for businesses and households.
  • Increasing the real value of debt and making it harder to repay.
  • Reducing incentives for investment and innovation.
  • Creating a downward spiral of falling prices and demand.

The Chinese government and the central bank have taken some measures to stimulate the economy and prevent deflation.

  • Cutting interest rates and reserve requirement ratios for banks.
  • Increasing fiscal spending and issuing special bonds for infrastructure projects.
  • Providing tax relief and subsidies for businesses and consumers.

However, these measures have not been enough to offset the deflationary pressure, and some analysts expect more monetary easing and fiscal support in the coming months.

Deflation definition

Deflation is the opposite of inflation. It means that the prices of goods and services are going down over time. This may sound good for consumers, who can buy more with the same amount of money. But deflation can also have negative effects on the economy.

Deflation can be caused by a decrease in the supply of money and credit, a fall in demand, or an increase in productivity. To prevent or reverse deflation, the central bank and the government can use monetary and fiscal policies to stimulate the economy, much the same as we are now seeing to deal with ‘inflation’.

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