While most of the world is struggling with high inflation, recent readings in China show that the year-on-year price index has declined. Analysts expect deflation, and this is a very dangerous phenomenon for the economy.
According to the latest data released by the Chinese authorities, the headline inflation index fell by 0.3% on an annualized basis. This is the first negative reading since the beginning of 2021, and the economy paralyzed by the pandemic has slowed down sharply.
Prices are going down
Chinese retailers have been hit by a slowdown in sales. This means that those who stockpiled goods expecting a surge in demand after the lifting of pandemic restrictions are now under pressure to lower prices.
The cost of cars has also fallen, after Tesla’s price cuts sparked a price war, and other brands have lowered their prices as well.
Chinese factories are already charging less for their goods as they respond to waning demand after falling commodity prices. China’s producer price inflation, which tracks prices at the factory gate, was -5.4% year-on-year in June.
The authorities downplayed fears of deflation. Liu Guoqiang, the vice president of the central bank, last month said there would be no risk of deflation in China in the second half of the year, but noted that the economy needed time to recover from the pandemic.
Falling prices may sound appealing to consumers in the West, where inflation hit a decades-high last year.
But deflation can hurt economic growth because consumers will delay buying products if they think they will be cheaper in the future. This leads companies to reduce investment as their profits decline, and may result in hiring freezes, pay cuts, and even layoffs.