The Chinese economy has slipped into deflation: As the statistics office in Beijing announced on Wednesday, consumer prices fell by 0.3 percent in July compared to the previous year. In June, prices had only stagnated after having increased slightly by 0.2 percent in May. Producer prices were down for the tenth straight month, falling 4.4 percent year-on-year in July.
Producer prices are the prices that manufacturers charge for their products. It is the first time since November 2020 that both consumer and producer prices have fallen in China. Deflation is the opposite of inflation and denotes a fall in the general level of prices.
Most economists consider prolonged deflation to be more dangerous for the development of an economy than slightly rising prices. At first glance, consumers benefit because they have to pay less for goods and services. However, deflation usually also puts pressure on company profits and thus harbors the risk of wage cuts or layoffs, for example.
Experts attribute the drop in prices in China to the persistently weak consumer demand and problems in the real estate market, among other things. After the end of the corona pandemic, the Chinese economy is recovering more slowly than most economists expected.
Only limited scope for monetary and fiscal policy
Investors are betting that the data will prompt the People’s Bank of China to implement anti-deflation monetary stimulus, such as interest rate cuts. However, the central bank faces a number of constraints, such as the weakened yuan currency and the economy’s high level of debt. Fiscal measures are also limited due to the financial pressures that many local governments are facing.
The Bureau of Statistics attributed the fall in consumer prices to the high base year-on-year, saying the fall is likely to be temporary as consumer demand continued to improve in July. “As the impact of last year’s high base gradually wears off, the consumer price index is likely to recover gradually,” Dong Lijuan, the bureau’s chief statistician, said in a rare addendum to the official data.
Beijing had previously tried to downplay the risk of deflation in the economy. Some China-based analysts said they were instructed by regulators not to discuss the issue publicly. Central bank officials said last week China will avoid deflation in the second half of the year.