China’s inflation problem and its effect

While much of the world is struggling desperately to stem the rising prices that are depressing living standards, China is working on the opposite. 

The consumer price (CPI) index increased by just 0.7% year-on-year in March. Factory gate prices have fallen for six straight months. Meanwhile, consumer prices in America were still 5% last month despite declining sharply; it was 8.3% in the European Union and 10.1% in the United Kingdom.   

Prices in China are flat and falling despite the People’s Bank of China (PBOC) decreasing interest rates and introducing liquidity into the financial system to support the economy, despite lifting strict COVID control measures late last year. 

Economic uncertainty means Chinese households continue saving rather than spending, and companies are wary of new investments. This uncertainty raises the specter of a sharp drop in prices and wages from which the economy would struggle to recover. 

Although GDP grew by 4.5% in the first quarter, Yeung added that the increase largely reflected the impact of weak buyer demand after three years of pandemic-related restrictions. With them, GDP growth is 2.6%. 

There is a torrent of money in the economy. The broad money supply, measured in M2, has reached a record of $5.6 trillion over the past 15 months. Moreover, the PBOC is trying to encourage people to spend by increasing bank liquidity through various policy tools. 

Deflation has started to take place 

Deflation is a sustained and significant fall in the public price level of goods and services over some time.

This situation is bad for the economy because, under these conditions, consumers and businesses can postpone spending in wait for further price cuts, which will only exacerbate economic problems.