Chinese economy is experiencing deflation as price declines for the first time since February 2021

Consumer prices in China fell in July for the first time in almost two years, marking the beginning of deflation in the country's economy.

Read More: China’s economic difficulties have led to the largest interest rate cut since 2020

Inflation was down 0.3% from a year ago, as measured by the official consumer price index.

This, according to analysts, puts further pressure on the government of the world's second largest economy to stimulate consumer spending.

This comes after recent import and export numbers were weak, casting doubt on China's ability to rebound quickly from the pandemic.

Local government debt is rising rapidly, and the property market is experiencing difficulties. As a record number of Chinese college grads prepare to enter the workforce this year, analysts are keeping a careful eye on the country's youth unemployment rate, which is at a record high.

Experts say falling prices make it tougher for China to reduce its debt and all the problems that come with it, such a slower growth rate.

Daniel Murray, an investment manager at EFG Asset Management, claims there is "no secret sauce" that may be used to increase inflation. He proposes easing monetary policy alongside increased government spending and reduced taxes.

When the price did decreases start?

Following the relaxation of pandemic restrictions, there was a notable surge in consumer consumption throughout the majority of wealthy nations. Individuals who had accumulated financial resources experienced a sudden surge in their ability and willingness to engage in consumption, leading to a significant increase in demand. Consequently, businesses had challenges in meeting this heightened level of 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 the context of China, it is noteworthy that price levels did not see a significant surge during the period when the economy was recovering from the implementation of the most rigorous coronavirus restrictions globally. The most recent decrease in consumer prices was observed in February 2021.

Why is deflation such an issue?

China is responsible for a significant share of the global production of items that are subsequently marketed in international markets.

One potential beneficial consequence of a prolonged period of deflation within the nation is its potential to prevent the rising trend of prices in various global regions, such as the United Kingdom.

Nevertheless, the potential influx of low-cost Chinese products into international markets may adversely affect producers in other nations. This could potentially have a negative impact on enterprises' investments and result in a reduction in employment opportunities.

A potential decline in prices in China may have adverse effects on both corporate profitability and consumer expenditure. Consequently, this could potentially result in an increase in the unemployment rate.

The potential outcome of this situation may lead to a decrease in demand from the largest global marketplace for energy, raw resources, and food, thus impacting worldwide exports.

The Chinese economy has enough problems without adding new ones. First, it is taking longer than expected to recover from the pandemic.

China's exports decreased by 14.5% in July compared to the same month the previous year, while imports decreased by 12.2%. The discouraging trade report confirms concerns about the potential deceleration of the nation's economic growth in the current year.

China is dealing with a persistent property market crisis following the near-collapse of its foremost real estate developer, Evergrande.

The Chinese government has conveyed the notion of maintaining control over the situation, however has refrained from implementing significant measures to stimulate economic growth.

According to Eswar Prasad, a professor of trade policy and economics at Cornell University, a crucial factor for China's recovery would be the establishment of confidence among investors and consumers.

According to Professor Prasad, the primary concern revolves around the government's ability to restore trust within the private sector. This would encourage households to engage in consumption rather than saving, and prompt firms to initiate investments, a goal that has not yet been achieved.

It is my belief that the implementation of substantial stimulus measures, which may encompass tax cuts, will be necessary.

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