China Deflation Signals Warning for Global Economy

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Consumer prices fell 0.3% in July in China. That’s surprising news for an economy that is supposed to be recovering from long Covid lockdowns. Stella Yifan Xie reports in The Wall Street Journal:

Tepid consumer demand and rising economic concerns in the world’s second-largest economy have tipped China into deflationary territory for the first time in two years, adding pressure on Beijing to act more aggressively to avoid a deepening economic malaise.

Instead of experiencing a surge in prices after the lifting of Covid-19 pandemic curbs late last year, China is suffering an unusual bout of falling prices for a range of goods, from commodities such as steel and coal to daily essentials and consumer products such as vegetables and home appliances.

China’s economic predicament stands in contrast to that of the U.S. and other developed Western economies, where soaring inflation after the lifting of Covid restrictions sent central banks, including the Federal Reserve, on an aggressive path of interest-rate increases aimed at cooling the economy without triggering a recession.

While falling prices in China may help ease inflationary pressure elsewhere as Chinese exports become cheaper, they could become the source of another concern for the global economy. For instance, a flood of low-price Chinese goods risks squeezing profits for producers in other countries and hurting employment opportunities.

Chinese consumer prices fell 0.3% in July compared with a year earlier. The latest available data for the U.S. showed that consumer prices rose 3% in June compared with a year earlier, the slowest pace in more than two years, while annual inflation in the European Union stood at 6.4%, easing from 7.1% in May.

For China, the absence of inflation reflects an imbalance in an economy characterized by ample supply and dormant domestic demand, the latter of which economists say Beijing must do more to rouse.

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