7 months ago • 2 mins
What’s going on here?
Data out on Wednesday showed that China’s consumer prices fell in July – including the cost of the country’s favorite meat.
What does this mean?
With over six months of tepid Chinese economic data behind us, July’s dip in prices wasn’t entirely unexpected. And that 0.3% drop from the same time last year was mostly down to food and energy costs taking a hit – with pork prices plummeting a hefty 26%. And sure, if you strip out volatile items like that, then prices actually still climbed. But those staples are a porky part of Chinese households’ expenses, and if they stay weak, falling prices could become a regular fixture in China.
Why should I care?
For markets: Deflation dread.
The mere whisper of deflation sends shivers down economists’ spines. Just ask China’s neighbor, Japan: after the late ’80s property bubble, the nation grappled with persistent price drops. And that meant consumers and businesses clutched their wallets tighter and tighter as time went on, awaiting future bargains – which ultimately caused a spending freeze that wreaked havoc on Japan’s economy and stock market. Spotting parallels between China now and Japan then is easy – from the countries’ aging demographics to their property market ups and downs – so China’s leaders will be desperate to avoid a repeat of Japan’s so-called “lost decades”. But, hey: maybe this data will finally shock them into making some serious economy-boosting moves.
The bigger picture: Watch closely.
Leaders in the West will be paying close attention to China’s inflationary trajectory. For one, it could be a sign of things to come: if the world’s second-biggest economy is any indicator, then the West could wind up grappling with declining prices too. And for another, lower prices in China might percolate through the world in the form of cheaper exports. And if both those things happen, a swifter-than-expected interest rate pivot just might be in the cards in the West.
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