China Approaches Deflation

Econintersect:  The latest official inflation numbers out of China show a 1.8% annual inflation rate for July 2012 as measured by the CPI (Consumer Price Index).  The PPI (Producer Price Index) for finished goods declined at an annual rate of 2.9%.  Both CPI and PPI have been plummeting in 2012.  CPI was 4.1% for December 2011 and the PPI was 1.7%.  One year ago the CPI was 6.5% and PPI was 7.5%.  The annual rates of change last month (June 2012) were +2.2% for CPI and -2.1% for PPI.  The continued declines in the price indexes have some concerned that China’s GDP growth, already at an annual rate of 7.6% for the first half of the year, could fall further.  Others feel that will not happen.

Because China has a lot of room to cut interest rates further, many feel that lower rates and accelerated government investment spending will turn the Chinese economy around.  However, there are some cautionary thoughts.  From Simon Rabinovitch in the Financial Times:

But the strength of this recovery is expected to be much milder than the rebound China experienced in 2009 when the government pushed through a mammoth stimulus programme.

That spending binge ultimately created stubbornly high inflation and a surge in local government debts, so Beijing has been much more reluctant to launch a similarly big stimulus this time.

A more optimistic side was mentioned by Bloomberg:

The steady decline in inflation has prompted warnings China might be entering a period of deflation, a potentially dangerous phenomenon. It can hurt the economy by prompting consumers to put off purchases in expectation of lower prices, causing a downward spiral of lower company revenues and wages.  Analyst say, however, the decline is due largely to a fall in commodity prices that should be temporary, and inflation should pick up later in the year as growth rebounds.

“The data reflects downward pressure on prices coming from weaker commodities,” said Kowalczyk. “We expect CPI inflation to rise from now on, reaching 3.8 percent at year end.”

Read this previous GEI News report for some historical data comparisons.

John Lounsbury

Sources:

• Chinese inflation falls to 1.8% (Simon Rabinovitch, Financial Times, 09 August 2012)

• China’s inflation falls, giving room for more stimulus (Joe McDonald, Bloomberg, 08 August 2012)

• China:  Prices Falling Off a Cliff, Trade Balance Unexpectedly Positive (GEI News, 10 July 2012)