China in deflation, hasn’t happened since 2021: what it means for the economy

Slow domestic consumption is holding back the recovery

Unlike major economies struggling with inflation, China in deflation for the first time in more than two years, weighed down by weak domestic consumption, which hampers economic recovery. Deflation is the opposite of inflation, which is falling prices of goods and services. While it may sound good for purchasing power on paper, deflation poses a threat to the economy. Instead of spending, consumers are postponing purchases in the hope of further price reductions. In the absence of demand, companies are forced to cut production, freeze hiring or layoffs, and accept further reductions to clear inventories, weighing on their profitability as costs remain unchanged. Economists call this phenomenon a negative spiral. China’s consumer price index, the main measure of inflation, fell 0.3% year-on-year in July, according to the National Bureau of Statistics (NBS). Analysts polled by Bloomberg had expected prices to fall 0.4%, following zero inflation last month. On a monthly basis, consumer prices are marking +0.2% from -0.2% earlier and against estimates of -0.1%. Producer prices are also bad: -4.4% pa, worse than expected from -4.1% and better than -5.4% in June.