In China, inflation has registered an increase of 0.1% year-on-year in April, falling below expectations and raising concerns about deflation. This is the lowest inflation rate that the country has seen in over two years. The low inflation numbers are worrying analysts, who take them as a testament to the slow and rocky economic recovery of China after the coronavirus pandemic.
The Consumer Price Index (CPI) registered an increase of 0.1% year-over-year, dropping from 0.7% registered in March. The drop in prices was caused in part by a decline in food and beverages prices, which went from 2.4% in March to less than 1% in April. Core inflation, which does not include prices of food and beverages, rose 0.7% year-over-year. The numbers are below the country’s expectations for this year, which were set around a 3% ceiling that now seems unlikely to be reached.
Some experts believe that China’s low inflation could be a sign of deflation, which would further hinder economic growth. Deflation is a decrease in the general price level of goods and services, which can lead to a decrease in consumer spending and investment. This, in turn, can lead to reduced production and job losses, creating a vicious cycle of economic stagnation.
Zou Lan, an official with the People’s Bank of China (PBOC), dismissed these worries, stating that “there is no basis for long-term deflation or inflation” and that consumer demand is expected to warm up during the second half of this year. Standard Chartered has also predicted that inflation levels will hit 0% in the coming months, “as a crude-oil price spike in the first half of 2022 created a high comparison base.”
Even though China is facing a low inflation rate, the bank has predicted a growth rate of more than 5% without adjusting interest rates, which are currently at 1%. Nonetheless, some experts are proposing measures to prevent deflation from occurring. One such proposal is to deliver cash handouts to citizens in order to encourage consumer spending and increase demand.
Li Daokui, a professor of economics at Tsinghua University and former member of the PBOC advisory board, has called for the government to deliver cash handouts to citizens to spur demand. In a statement last month, Li said, “Even with a conservative estimate, 500 billion yuan ($78 billion) in consumption vouchers will drive one trillion yuan ($156 billion) in overall consumption.” He also argued that the state would receive over 300 billion yuan ($47 billion) in taxes derived from the spending directly enabled by cash handouts.
In summary, China’s low inflation rate is causing concern among analysts who fear deflation could lead to a prolonged period of economic stagnation. While some experts argue that these fears are unfounded, others are proposing measures such as cash handouts to increase consumer demand and stave off deflation. As the world’s second-largest economy, China’s economic health has a significant impact on global markets, making the issue of inflation and deflation an important topic of discussion for economists and policymakers alike.
