Deflation. That is not a word we have heard tossed around in quite a while. Though inflation is the problem confronting most of the world, it is deflation that hovers over the Chinese economy.
Deflation occurs when the prices of goods and services fall. Deflation expectations make consumers wait for future lower prices. That reduces demand and slows growth. Deflation is worse than inflation because interest rates can only be lowered to zero.The Balance
Why is China struggling with deflation? Well, we are part of their problem. We are buying less. And it’s not just us; Chinese consumers are keeping their wallets in their pockets too. How bad is it? Here is how the Wall Street Journal describes the problem:
Prices charged by Chinese factories tumbled in May at their steepest annual pace in seven years.
China’s producer prices—what companies charge at the factory gate—fell 4.6% from a year earlier in May, the weakest reading since early 2016 and the eighth straight month of declines.
While a prolonged period of falling prices probably isn’t in the cards, Chinese policy makers will nonetheless need to do more to stave off that risk and get the economy motoring again, economists say, perhaps by trimming interest rates, weakening the currency or offering cash or other spending inducements to households and businesses.China’s Inflation Problem? It Has None, Jason doughlas, wall street journal, kune 9, 2023
Trimming interest rates and weakening the Chinese currency will mean lower prices for those who manufacture in China. China is not just exporting toys. They are exporting deflation as well. Both are good news for countries wrestling with inflation.