Signs of Deflation: China Economy Drops After 2021

Consumer prices in China have decreased for the first time in more than two years as sluggish spending impedes the post-pandemic recovery of the economy.

According to data released on Wednesday by the National Bureau of Statistics, the Consumer Price Index (CPI) fell by 0.3 percent in July after holding unchanged the previous month, signalling a deflationary trend in the Chinese economy.

After exports dropped by 14.5 percent last month, the worst loss in three years and the third straight month of decline, the pricing contraction is the latest indication of a gloomier future for the second-largest economy in the world.

Sectors in Economy

The consumer price index (CPI) decreased by 0.3% in July compared to the same month last year, the National Bureau of Statistics of China reported on Wednesday. Since February 2021, the index hasn’t dropped before.

In July, the price of food, travel, and household products all decreased. Particularly, the cost of pork was down 26%, while the cost of vegetables was down 1%. In recent months, deflationary indicators have increased in the second-largest economy in the world, raising fears that China may experience protracted stagnation.

“Evidence of combined consumer and producer price deflation undoubtedly endorse the notion of a broad-based economic slowdown in China, ” said analysts from ING Group in a research note on Wednesday.

China And The Pandemic

China refrained from the massive covid-era support seen in industrialised nations. Although this helped it avoid the widespread inflation shock witnessed elsewhere, UBS analysts recently stated in a research note that disposable household income decreased as salaries and property asset values concurrently stopped.

Although the government has adjusted interest rates, vowed to provide support for the private sector, and taken some initiatives to stimulate the housing market, the economic recovery has not been significantly boosted by these actions.

“It is not clear at this stage if the policies announced recently can turn around the economic momentum soon. The CPI deflation may put more pressure on the government to consider additional fiscal stimulus to mitigate the challenge.” Zhiwei Zhang, Chief Economist in Hong Kong added.

After a quick recovery from COVID-19 and strict economic controls at the beginning of the year, China’s economy has stalled amid declining domestic and international demand.