China’s economy has reportedly fallen into what is known as a “deflation” - although this term has been vigorously denied by the country’s government.
According to several reports, the National Bureau of Statistics of China (NBS) said on Wednesday that prices have declined for the first time in more than two years.
The consumer price index (CPI), a widely used headline measure of inflation, fell by 0.3 per cent in July compared to the same month in 2022.
It is China’s first negative inflation reading since early 2021, when Covid hit trade and pork prices fell, but this week’s events are likely to preempt greater calls for government intervention.
What is deflation?
Deflation is when the prices for goods or services decrease across the whole economy - which can empower consumer spending.
It is generally considered bad news for the economy and your own money. This is because people can delay purchases when they feel prices are going to keep dropping which can then, in turn, lead to less income for producers. It can begin a cycle that can see eventual unemployment and wider economic downturns or recessions.
Deflation can be measured by readings such as the CPI - which tracks commonly purchased goods and their prices over time.
Chinese National Bureau of Statistics spokesperson Fu Linghui told a press conference in Beijing that there is “no deflation” in China and there will not be in the future.
He did, however, acknowledge that the economy does face challenges.
Why is China going through deflation?
Separate figures released at the same time as the CPI statistics have shown that imports and exports fell to a greater extent than expected last month.
This has been paired with a slowdown in sales and a lessening demand for Chinese products on the global market. There has also been a price war in China over electric cars after Tesla entered the fray.
China has also seen falling food prices with its core inflation rate up to 0.8 per cent year on year, a 0.4 per cent rise from June to July. This has eased the cost of living situation in China.
Will the UK go into deflation?
Like China, the UK’s CPI has also fallen to ease the cost of living crisis and the figure is forecast to fall back slowly to around 5 per cent by the end of the year. That would meet Rishi Sunak’s New Year pledge to halve inflation in 2023.
Last year, the UK narrowly avoided a recession but deflation has not been ruled out for 2023 or next year.
“The UK economy is expected to face a prolonged recession with declining growth and increased unemployment in 2023-24, causing deflation,” Muhammed Ali Nasir, of the University of Leeds, wrote on Conversation.
“Limiting pay rises can have a deflationary effect because people have less to spend, but it also weighs on economic growth and productivity.”
He is far from the only person to have predicted this nature of the UK but the top brass in Whitehall are looking at it more favourably.
Chancellor of the Exchequer Jeremy Hunt said: “The decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year.
“But while price rises are slowing, we’re not at the finish line. We must stick to our plan to halve inflation this year and get it back to the 2 per cent target as soon as possible.”
