China registers first deflation in two years – 08/08/2023 – Market

China’s economy registered deflation for the first time in more than two years, in one of the clearest indications of the challenges faced by policymakers in reviving the country’s consumption.

The consumer price index fell 0.3% year-on-year in July. In the previous month, prices remained stable. The producer price index, which measures the change in prices received by producers, fell 4.4% in July.

Consumer prices, which last fell in February 2021, have been verging on deflation for months since China’s economic momentum failed to recover with the strength expected after the lifting of pandemic restrictions earlier this year.

The shift to deflation is likely to fuel calls for more government stimulus at a time when policymakers are also grappling with a housing slowdown and weakness in trade.

Data released this Tuesday (8) showed that July exports fell 14.5% year on year, the steepest drop since the beginning of the pandemic.

“The Chinese economy is now at serious risk of slipping into a deflationary episode that could trigger a vicious downward cycle in growth and private sector confidence,” said Eswar Prasad, an expert on China finance at Cornell University.

The Chinese government is targeting an average inflation rate of 3% through 2023, highlighting the growing divergence between official expectations and reality on the ground.