Econintersect: Consumer price inflation remains but for 17 months the PPI (Producer Price Index) has been deflating year-over-year. The latest CPI 
(Consumer Price Index) is up 2.7% for July from the same month in 2012, equaling the gain for June and higher than the 14-month average of 2.2%. The CPI increase was dominated by food. Without food prices (up 5%), the CPI would have been 1.6%. The low inflation without food is causing some observers to call for China to cut interest rates and increase liquidity. Such action would be contrary to recent actions by the government and the People’s Bank of China to tighten credit available in a run-away shadow banking system.
The year-over-year comparisons will be especially biased against continued PPI deflation in August and September because in 2012 those two months printed the lowest readings in over 10 years, except for 8 months in the heart of the Great Financial Crisis. If deflation continues for the coming two months the likelihood of a long-term deflationary risk for China will be greatly increased. The multi-year over-investment in excess capacity could be a turkey coming home to roost.
Is China trapped in deflation? The next two months will go a long way toward giving a tentative answer to that question.
Click on graph for larger image.
GEI News issued early warnings about the deflationary risk unfolding in China starting in June 2012, long before it was on most radar screens. See China: Economic Numbers Weaken, Inflation Slows. Does Deflation Await?
The following graph serves to remind that just two years ago China was grappling with inflation above 6%. Just before the Great Recession hit in earnest China inflation peaked above 8% for several months in early 2008 (not shown on graph).
Click on graph for larger image.
Sources:
- Muted China inflation to spark rate cut calls (Jamil Anderling, Financial Times, 09 August 2013)
- China Producer Prices (Trading Economics)
- China Inflation Rate (Trading Economics)
- China: Economic Numbers Weaken, Inflation Slows. Does Deflation Await? (GEI News, 09 June 2012)
