China in Grip of Wholesale Deflation

Econintersect: China’s consumer price index (CPI) increased 1.6% in July from a year earlier, according to China’s National Bureau of Statistics, more than the 1.5% median expectation according to Reuters and uo from the 1.4% increase in June and 1.2% in May.   The rise in consumer prices was driven significantly by higher food prices. The PPI (producer-price index) fell 5.4%, continuing a long-term deflationary period, now 40 months in duration. Beijing has been loosening monetary policy in an attempt to reduce the deflationary pressures and, also, in an effort to support a slowing economy.

Two months ago we reported that there was some optimism that the Chinese economy might be ready to stop sliding.  From GEI News 08 June:

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

We are not finding suggestion of optimism this month.  The crash of the Chinese stock market has increased concern about China’s economy, as has low manufacturing output and employment.  And the down trends shown in the graphs above (data through May) have continued for June and July and the PPI reading of -5.4% has touched the support line for only the second time in 3 years.

We started reporting on the deflationary trend in China more than three years ago.  This is from GEI News 09 June 2012:

No one seems to be commenting on it but the rapidly deflating PPI numbers should start raising the possibility that China could enter deflation.

John Lounsbury

Sources:

• China July producer prices slump to near six-year low (Reuters, 08 August 2015)

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

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

• China Struggles with Deflationary Pressures (GEI News, 08 June 2015)

• China: Economic Numbers Weaken, Inflation Slows. Does Deflation Await? (GEI News, 09 June 2012)