The Focus This Week: China’s Falling Prices
While much of the world is still battling the final vestiges of high inflation, China is grappling with a very different (and arguably thornier) problem: deflation. A three-year crisis in the property sector has dented household wealth and buying confidence, and that’s caused folks to spend less. This drop in aggregate demand has left consumer prices stagnant since early 2023. For example, figures for October showed annual inflation unexpectedly declined to a fourth-month low of 0.3%, despite a huge new stimulus package that aimed to get folks spending again. The worry about deflation is that once it starts, it’s very hard to stop.
Economists expect November’s figures, due on Monday, to show a slight uptick in the inflation rate, though it’s likely to remain below 1% for the 18th consecutive month.
Now, an above-zero result won’t necessarily mean that China’s economy is out of the woods. After all, there’s a broad measure of prices that shows that the world’s second-biggest economy is still firmly in the deflation zone. That’s the “GDP deflator”, which compares the size of the economy in nominal and real (i.e. inflation-adjusted) terms. This measure offers a more comprehensive view of inflation than consumer prices alone because it takes into account price changes for all goods and services produced within an economy. So that’s the bad news: the metric shows there’s been six consecutive quarters of deflation – the longest stretch since 1999.
That’s sure to worry policymakers, since prolonged deflation can lead to a downward spiral of economic activity. Here’s what happens: consumers – anticipating further price drops – tend to delay purchases, which dampens already weak consumption. Businesses, in turn, typically lower production and investment because of uncertain demand. What’s more, those falling prices generally lead to lower corporate revenues, which can hit wages and profits. Finally, though prices and wages fall during deflationary times, the value of debt doesn’t – so that adds to the burden of repayments and raises the risk of defaults.
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