China Deflation

China’s termination of its zero-COVID policy has not been sufficient to revive its flagging economy. In particular, its massive real estate sector has struggled, as reports of liquidity concerns have arisen. We are certainly not experts on the Chinese economy, though Adam Tooze has begun a series of insightful chartbooks to review various assessments of China—but our focus instead is on a more narrow concern.

China has slipped into deflation, with the consumer price index falling 0.3% over the past year. There are questions as to whether this deflation is a temporary circumstance, or a sign of a more troubled economy. However, as George Glover notes, deflation in China may end up having the silver lining of helping ameliorate the high inflation plaguing much of the developed world.

China’s producer price index has plunged 4.4% over the past year. If these falling prices are reflected in exports, then we could see inflation ease somewhat in the US and Europe. Central bankers could perhaps end monetary tightening sooner or begin cutting rates earlier than previously thought. Recession risks would fall, and growth prospects would likely improve. Given that US inflation, while improving, remains well above target, additional factors that cool inflation may help the US more readily normalize inflation without undue pain to the labor market and the broader economy.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.