China Falls into Deflation as Economic Troubles Mount

August 9, 2023

Chinese consumer prices dipped into deflationary territory in July as the deepening economic woes in the world’s second-largest continue to mount.

The data is the latest blow against the nation’s economic recovery. The post-pandemic domestic consumer spending boom has failed to materialize, and instead, Beijing has been confronted with a host of problems. Youth unemployment has hit record highs above 20%, the housing market is in the midst of a protracted downturn, and exports last month tumbled at the fastest pace since the beginning of the pandemic.

Now, the country is facing the inverse of what happened in most of the rest of the world after Covid restrictions ended. Rather than the inflation that many other nations have been grappling with, China has seen falling prices for everything from commodities like steel and coal to consumer goods like home appliances and daily necessities like vegetables.

Chinese consumer prices fell 0.3% in July compared with a year earlier. While Chinese officials have offered assurance that the deflation is transitory—echoing similar sentiments from the Federal Reserve when inflation started taking hold in the U.S.—there is a real danger of it becoming entrenched. The expectation of falling prices could further diminish domestic demand, exacerbate debt burdens and lock the Chinese economy in a trap that will be hard to escape with the standard stimulus measures that Beijing typically turns to.

Deflation is particularly risky for countries with high debt burdens such as China, since it will add to debt servicing costs for borrowers and likely prompt them to spend and invest less.

Falling prices in China could help ease inflationary pressures in the rest of the world as Chinese exports become cheaper, but there is also the risk that a flood of low-price Chinese goods could undercut overseas competitors, leading to job losses and economic drag in developed countries.


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