China Faces Deflation Challenge as Consumer: This year, declining prices have surprised China, a country known for fighting inflation. The National Bureau of Statistics reported a 0.5% decline in the Consumer Price Index (CPI) in November, the largest drop since November 2020. This decline exceeded expectations, as analysts had predicted a more moderate 0.1% decrease. The dip in CPI indicates an acceleration from October when it fell 0.2% year-on-year, prompting calls for urgent action from Beijing to stimulate demand and prevent a potential downward spiral of prices.
China’s struggle with weak prices throughout the year is attributed to a property market slump and subdued consumer confidence. Consumer inflation has been on a downward trajectory since February, reaching negative territory in July for the first time in over two years. Although it returned to positive territory in August and remained flat in September, it dipped back below zero in October. Analysts from Citi emphasized the deepening deflation situation, citing factors such as falling domestic food prices, corrections in international oil prices, and weak domestic demand.
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A significant contributor to the decline was the 4.2% drop in food prices, particularly a staggering 31.8% decrease in pork prices.International oil prices fell, lowering gasoline prices. In November, services inflation fell to 1% from 1.2% in October. The Producer Price Index (PPI), impacted by commodity and raw material costs, fell 3% in November for the 14th straight month.
The worsening deflationary pressure raises concerns about China’s economic recovery. Analysts stress the need for decisive policy measures to prevent a potential vicious loop between deflation, declining confidence, and economic activities. Pan Gongsheng, Governor of the People’s Bank of China, has pledged to support the economy with flexible monetary policy. After a Politburo meeting, Chinese leaders committed to raise domestic demand and consumer spending, setting the groundwork for policy changes in the coming months. Investors are eagerly awaiting details from the Central Economic Work Conference for insights into economic policies for the upcoming year, with expectations of imminent cuts to the reserve requirement ratio and policy rates.
Our Reader’s Queries
What is the problem with deflation in China?
According to a report by Citi analysts on Sunday, China’s deflation situation is worsening due to a combination of factors including domestic food prices, international oil price corrections, and weak domestic demand. The report also highlights that the signs of price weakness are now extending from goods to services.
What happens to consumers during deflation?
While deflation may seem like a good thing for consumers at first, it can actually have disastrous consequences if it persists for too long. The Great Depression is a prime example of this. Prolonged deflation can result in higher unemployment rates and even cause people to default on their debts. This is why it’s important to keep a close eye on inflation and take action if deflation becomes a concern.
What is one problem with deflation is that it causes consumers to?
The negative impact of deflation is multifaceted. Firstly, it can cause consumers to reduce their spending due to the expectation of further price drops. Secondly, businesses may resort to cutting wages or laying off employees to maintain their profit margins. Lastly, deflation can make it more difficult for borrowers to pay off existing debts as the cost of borrowing increases. All in all, deflation can have far-reaching consequences that affect both individuals and businesses alike.
What are the challenges faced by China?
China’s swift industrial and urban development has resulted in a significant environmental toll. The country is grappling with issues such as air pollution, water contamination, and soil degradation, which have far-reaching consequences for public health and the economy. These challenges are a cause for concern and require immediate attention to mitigate their impact.