Chinese deflation
China’s consumer prices have slipped into deflation for the first time since its peak-pandemic demand lull in early 2021. The consumer price index was down 0.3% in July, according to the latest official data. This comes a day after the country reported a drop in exports as well as imports last month.
Broadly, evidence is adding up of a sharp decline in the health of a $16 trillion economy (in constant 2015 dollars), one that’s large enough to have a global impact. Not only does it have a demand slump at home, its export engine is sputtering. All this will show up in weak growth.
Its policy response to deflation, apart from the standard lowering of interest rates, would be interesting to watch. Prices going down can be a big nightmare, as it means money unspent actually gains in value, a classic trap of a commercial wind-down that Keynes had warned us of. That policy rates of interest cannot go below 0% adds to the economic revival challenge.
The fiscal heave that would be needed to reverse a deflationary spiral could lump Beijing with a heavy bill. China must arrest its problem before it worsens. Zero inflation is never a policy goal for this very reason: too close to the edge.
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