China Struggles With Deflationary Pressures

Econintersect: China’s consumer price index (CPI) increased 1.2% in May from a year earlier, according to China’s National Bureau of Statistics, lower than the 1.3% median expectation from a Bloomberg survey and the 1.5% increase in April.  The PPI (producer-price index) fell 4.6%, continuing a long-term deflationary period, now over three years duration.  Beijing has been loosening monetary policy in an attempt to reduce the deflationary pressures and, also, in an effort to clean up local government debt.

There are some hopeful voices among observers, still hoping for no return to inflation – rising prices still being considered the risk to worry about.  Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, was quoted by Bloomberg:

“The economy is bottoming but not bottoming out, as overall demand is still weak.  As long as inflation pressure remains stable, PBOC still has space to pump in liquidity.”

Optimism is great, but what is going on is long-term, starting about four years ago, as illustrated by the two graphics below from Trading Economics, annotated by Econintersect.  The trend is disinflationary and deflationary – inflation is not even on the horizon.

John Lounsbury

Sources:

• China Deflation Risks Linger, Underscoring Weak Local Demand (Bloomberg Business, 08 June 2015)

• China Inflation Rate (Trading Economics, 10 June 2015)

• China Producer Prices Change (Trading Economics, 10 June 2015)