Consumer prices in China fell in July. This has now led to deflation. If the downward spiral in prices continues, this could have devastating consequences for the economy.
The Chinese economy has slipped into deflation. As the statistics office in Beijing announced today, 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.
Danger of a downward spiral
The trend is even clearer when it comes to producer prices – i.e. the prices that manufacturers charge for their products. They were down for the tenth straight month, falling 4.4 percent year-on-year in July. It is the first time since November 2020 that both consumer and producer prices have fallen in China.
The development had been indicated in China for some time. Deflation means a fall in the general price level. Most economists consider prolonged deflation to be more economically dangerous than slightly rising prices.
At first glance, consumers benefit because they have to pay less for goods and services. But the expectation that prices will fall even further is choking off consumption. Deflation also usually puts pressure on company profits and thus entails the risk of wage cuts or layoffs, for example. This can create a risky downward spiral.
government has stimulus packages announced
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 expected by most economists and is suffering from a weak global economy and falling domestic demand. The government in Beijing has promised a series of measures to support the economy, and further economic aid is expected.