Unlike in many Western countries, prices in China are not rising, but falling. But deflation is not a good sign. Rather, it shows that many consumers are unsettled.
China’s economy slipped back into deflation in October. As the statistics office in Beijing announced, prices for goods and services fell by 0.2 percent compared to the same month last year.
After July, this was the second month this year in which consumer prices fell. They stagnated in September after rising slightly by 0.1 percent in August. Producer prices also fell by 2.6 percent in October compared to the same month last year.
What is deflation?
Deflation is the opposite of inflation and refers to the decline in the general price level. A general price decline occurs when consumers hold back on purchases in anticipation of further falling prices, which in turn depresses companies’ sales, profits and investments. Most economists consider deflation to be more dangerous for the development of an economy than slightly rising prices.
At first glance, consumers benefit because they have to pay less for goods and services. However, deflation usually also puts pressure on companies’ profits and therefore poses the risk of wage cuts or layoffs, for example.
Real estate market as a possible reason
Unlike in the West, the Chinese have not had to contend with such high inflation in recent years. While prices in Germany rose by an average of 7.9 percent in 2022, in the People’s Republic it was only around two percent.
According to observers, the fact that the Chinese economy is now slipping into deflation is a sign of the ongoing economic weakness. Many Chinese people are holding back on consumption because they are insecure for several reasons.
One reason is the troubled real estate market. As the value of their homes declines, many people are holding back their savings because of the uncertain future prospects. On the other hand, in this environment, rents do not rise as much or even fall, which also contributes to deflation.
Prices have also fallen recently on the car market: electric cars are particularly in demand in China. However, the numerous providers are engaged in a bitter battle for customers, which has led to high discounts.
A special factor in Chinese inflation statistics has always been the price of pork, which accounts for a relatively large share in the calculation of consumer prices. Due to an oversupply of pigs, prices have fallen significantly recently.
Source: Stern
