China's economy entered deflation in July for the first time in more than two years, as consumer prices fell. The official consumer price index, a measure of inflation, decreased by 0.3% from one year ago to the previous month according to sources.
This, according to analysts, increases the burden on the government to stimulate demand in the world's second largest economy.
This follows weak import and export data, which prompted concerns about the pace of China's recovery post-pandemic. The nation is also dealing with soaring local government debt and housing market difficulties. Youth unemployment, which is at a record high, is also being closely monitored, as a record 11,58 million Chinese university graduates are expected to enter the labor market this year.
Daniel Murray of the investment firm EFG Asset Management states, "There is no secret sauce that can be used to increase inflation." He proposes a "simple combination of increased government spending and lower taxes in conjunction with looser monetary policy."
After pandemic restrictions were lifted, consumer expenditure in the majority of developed nations increased. People who had saved money were abruptly able and eager to spend, and businesses struggled to meet the demand. After Russia's invasion of Ukraine, the combination of a sharp increase in demand for limited-supply goods and rising energy costs lead to price inflation.
In China, however, prices did not skyrocket as the economy emerged from the world's strictest coronavirus regulations. The last decline in consumer prices occurred in February 2021.
In actuality, they have been on the verge of deflation for months, having reached a plateau earlier this year due to lackluster demand. The prices levied by Chinese manufacturers, also known as factory gate prices, have decreased. China manufactures a significant portion of the world's merchandise.
A potential benefit of an extended period of deflation in the country could be that it serves to curb price increases in other parts of the world, including the United Kingdom. However, if China floods global markets with low-priced products, this could have a negative effect on manufacturers in other nations. This could impede business investment and reduce employment.
A period of falling prices in China could impact company profits and consumer expenditure. Consequently, unemployment may increase.
It could cause a decline in demand for energy, basic materials, and food from the world's largest consumer market, which would have a negative impact on global exports.
China's economy already faces additional obstacles. First, it is recovering from the effects of the pandemic at a slower rate than anticipated. The dismal trade data bolsters concerns that the nation's economic development may slow further this year.
After the near-collapse of its largest real estate developer, Evergrande, China is also experiencing an ongoing property market crisis.
The Chinese government has been sending the message that everything is under control, but has thus far refrained from taking any significant economic growth-promoting measures.
Eswar Prasad, a professor of trade policy and economics at Cornell University, stated that boosting investor and consumer confidence is essential for China's economic recovery.
The true question, according to Professor Prasad, is whether the government can restore confidence in the private sector, so that households will spend rather than save and businesses will begin investing, which has not occurred yet.