Consumer prices fell for the first time in more than two years in July, and producer prices contracted for the 10th consecutive month. This is a sign that demand in the world’s second-largest economy is weakening. The consumer price index (CPI) fell by 0.3% in July from a year earlier, the National Bureau of Statistics said Wednesday. This is the first time since February 2021 that the CPI has declined. Economists surveyed by Bloomberg had expected a 0.4% decline.
The producer price index (PPI) fell by 4.4% in July from a year earlier. This is the 10th consecutive month of contraction for the PPI. The PPI measures the prices of goods at the factory gate, and a decline in the PPI indicates that input costs for businesses are falling.
The decline in consumer and producer prices is a sign that demand in China is weakening.
Here is all you need to know about deflation and its impacts:
What is deflation?
Deflation is a decrease in the general level of prices of goods and services. This means that consumers can buy more with their money, but businesses may see their profits decline as they have to sell their products for less.
What are the causes of deflation?
There are a number of factors that can cause deflation, including:
A decrease in aggregate demand, which is the total amount of goods and services that consumers and businesses are willing to buy. This can happen during a recession, when people are less confident about the economy and are less likely to spend money.
An increase in aggregate supply, which is the total amount of goods and services that businesses are willing to sell. This can happen when businesses become more efficient and are able to produce more goods and services at a lower cost.
A decrease in the money supply, which is the amount of money in circulation. This can happen when central banks raise interest rates or sell government bonds.
What are the impacts of deflation?
Deflation can have a number of negative impacts on the economy, including:
A decrease in economic growth, as businesses may see their profits decline and may be less likely to invest and hire new workers.
An increase in unemployment, as businesses may have to lay off workers in order to cut costs.
A decrease in asset prices, such as stocks and real estate, as people become less willing to pay high prices for assets that are expected to lose value in the future.
A decrease in consumer spending, as people may delay purchases in the hopes of prices getting lower in the future.
What can be done to prevent deflation?
Why is China experiencing deflation?
There are a number of factors that have contributed to China’s deflationary spiral. One is the ongoing turmoil in the real estate sector. The real estate market has been a major driver of growth in China for many years, but it has been hit hard by a combination of factors, including a government crackdown on debt and a slowdown in the global economy. This has led to a sharp decline in property prices, which has in turn dampened consumer spending.
Another factor contributing to deflation is the weak global economy. China’s exports have been hit hard by a decline in demand from overseas markets. This has led to a slowdown in production and investment in China, which has further contributed to deflation.
The deflationary trend is likely to continue in the coming months. The Chinese government has taken some steps to stimulate the economy, but these measures have so far had little effect. As a result, deflation is expected to weigh on China’s economic growth in the second half of 2023.
What is China govt saying on deflation?
Despite the recent decline in consumer and producer prices, Chinese authorities have downplayed concerns about deflation. Deputy Governor of the People’s Bank of China (PBOC) Liu Guoqiang said last month that there would be no deflationary risks in China in the second half of the year. He noted that the economy needs time to return to normal after the pandemic.
The government has set a consumer inflation target of around 3% this year, which would be up from 2% recorded in 2022. However, consumers and manufacturers remain cautious amid the still-weak housing market and high youth unemployment. There is also a diminishing appetite among foreign firms to invest in China.
(With inputs from agencies)