Exploring the Troubling Implications of China’s Low Inflation Rates
Analysis | Why Low Inflation in China Is No Cause for Applause
China’s economic recovery after the pandemic has been in the headlines, with impressive growth numbers, particularly compared to other major economies. However, there is a worrying dissonance between these figures and the inactivity of inflation. Despite the dismantling of pandemic rules, prices have remained low, and this is cause for concern.
The Disappointing CPI and PPI Figures
In April 2022, consumer prices rose only 0.1% YoY, the lowest number in two years. This was below economists’ forecasts and not a one-time problem, as CPI figures have been steadily lower since the start of the year. The factory gate was even worse, with producer prices tumbling 3.6%, partially due to softer commodity costs. These numbers indicate serious challenges beneath the respectable headline growth numbers, which are not good news for China.
The Yellen Comparisons
Janet Yellen may seem like an odd comparison for China’s inflation troubles, given that she is currently the US Treasury Secretary. However, when she was the Federal Reserve Chair several years ago, she agonized over inflation numbers that were too low for comfort despite a strong recovery from the sub-prime mortgage fiasco.
In 2019, her successor, Jerome Powell, believed it best to wait for the whites of the eyes before acting on projections of an imminent climb in inflation. Other monetary chiefs took a similar approach, which worked until borrowing costs had to be ratcheted up dramatically in 2022. Of course, neither Powell nor European Central Bank chief Christine Lagarde would want the low numbers China is reporting; these suggest sub-par demand in essential parts of the economy.
A Lopsided Recovery
The Chinese economic recovery has been called “lopsided.” The manufacturing and export sector are struggling with slowing global growth, while retail sales are robust. Critical factory gauges have languished recently, and some are growing more concerned about a US recession. The sympathetic view is that China has reopened into a global rebound past its prime. Chinese consumers are spending heavily at home without having a broader impact. This is a disappointment, although some argue it will eventually bring price stability.
The Need for PBOC Intervention
For now, there is a need for intervention from the People’s Bank of China. An interest rate cut may be necessary to signal that officials are on the case. PBOC Governor Yi Gang did not seem overly worried about inflation during a recent speech to the Peterson Institute for International Economics in Washington. Still, if China wants to achieve a sustainable economic recovery, it will eventually need to address the inflation challenges.
- Inflation has been a concern for China since late 2021 when the country shifted away from its “Covid Zero” policy.
- China’s economy grew 8.1% in 2021, making it the only major to avoid a contraction amid the Covid-19 pandemic.
The low inflation numbers in China may seem like good news, but they indicate broader economic challenges and could cause concern. As a result, monetary authorities may need to intervene to ensure a sustainable recovery.
While China’s headline growth numbers are impressive, the low inflation rates suggest more profound challenges beneath the surface. If China is to achieve a sustainable recovery, it may need to focus on stimulating demand in critical sectors and address underlying inflation challenges.