While the US and most Western economies battle inflation, China has a different problem; deflation. The second-largest economy released official data on Wednesday that showed the Consumer Price Index, a measure of inflation, fell by 0.3%, after flatlining in June.
Deflation might seem like an encouraging trend at first glance; prices are falling and you can buy more goods or services with the same amount of money. But it is not exactly good news. For, deflation hints at a severe economic downturn. The last time the US experienced it was between 2007 and 2008, during what economists call the 'Great Recession'.
During deflation, people tend to delay purchases, in the hope that they can buy things at cheaper prices than today. This means lower consumer spending, which, in turn, means less income for producers. This can force producers to trim wages, initiate layoffs and cut costs.
However, for people with debt, the value doesn't change despite falling prices. Consumers and businesses often decrease spending as a result. This also results in a spiralling effect as deflation causes further deflation.
What's happening in China?
Consumer spending, the bloodline of an economy, rose across the globe after Covid restrictions were eased. People began spending more and demand spiked, especially after the Russia-Ukraine war put curbs on supply.
But, not in China. Prices did not soar in the country as its economy emerged from the world's tightest coronavirus rules. Since China had prolonged Covid restrictions, people were stuck at their homes for longer periods causing unemployment. The country was left with a bloated manufacturing sector and too much inventory. This coupled with the ailing housing market and a waning interest among foreign firms to invest in China, hit the country hard.
The weak demand has resulted in the prices charged by China's manufacturers - known as factory gate prices - falling. "It is worrisome as far as it shows that demand in China is poor while the rest of the world is awakening, especially the West," Alicia Garcia-Herrero, an adjunct professor at the Hong Kong University of Science and Technology, told BBC. "Deflation will not help China. Debt will become more heavy. All of this is not good news," she added.
How will deflation in China impact the world?
Though deflation in an exporting economy like China helps control prices in other parts of the world battling inflation, flooding markets with
cut-price Chinese goods could adversely affect other manufacturers. Exports becoming cheaper due to deflation will force other economies to slash their prices or risk losing market share. Reduced demand for raw materials and commodities due to its economic slowdown is likely to lead to a decrease in global commodity prices.
