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Only China is an economic power struggling with deflation – and that has consequences

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Only China is an economic power struggling with deflation – and that has consequences

Prices are rising everywhere – only China is experiencing deflation. REUTERS/Aly Song

China has been struggling with falling consumer prices for several months.

No other major economy in the world is currently experiencing deflation.

China’s deflation problem comes against a backdrop of a housing market collapse, recession and weak consumer confidence.

This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and checked by a real editor.

Only China experienced deflation in 2023. This is still the case two months after the start of the new year. The country is struggling with a collapse in demand as a result of the real estate crisis and the general economic misery.

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China is the only major economy with falling consumer prices, which fell 0.8 percent in January from a year earlier. This was the fourth straight month that prices fell – and the sharpest decline in 15 years.

China is currently the only major economy experiencing deflation. IIF

Some economists have suggested that the sharp decline could be due to seasonal factors. But the trend still continues. Deflation puts pressure on household incomes, corporate profits and government taxes. According to the Institute of International Finance (IIF), Beijing has a difficult road ahead to achieve recovery.

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Deflation in China appears to be continuing

In the last 22 months, China’s consumer price index was below one percent. The country’s GDP deflator, a broad measure of domestic prices, was -0.5 percent in 2023 compared to the previous year. This suggests that deflation is broad-based.

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“Overcapacity in industry and the recession in the real estate sector are responsible for deflation,” IIF economists wrote in a note on February 28. They also added that the former explains why prices for goods have fallen more than those for services.

And China’s ongoing housing market slump has depressed prices for household goods and housing. Home sales fell 6.5 percent last year. This in turn has caused prices for household appliances, furniture and home improvement products to fall, according to the IIF.

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“As expectations of continued deflation materialize, consumers and investors will limit their spending,” said the IIF economists. “Deflation will reduce nominal GDP, thereby increasing the debt-to-GDP ratio and exacerbating the debt overhang. Falling asset prices and the negative wealth effect are harming investment and consumption.”

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