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China is facing concerns of potential deflation as Inflation starts to cool down globally. In August, consumer price Inflation in China rose by 0.6%, mainly driven by higher food prices due to unfavorable weather conditions. However, core consumer Inflation slowed to 0.3%, the lowest reading in three and a half years, while producer prices declined by 1.8% year-on-year.
Analysts warned of the dangers of prolonged deflation, which could lead to declining paychecks, reduced consumer spending, lower corporate revenues, and possible layoffs. They referred to Japan’s “lost decades” in the 1990s as a cautionary tale of the challenges posed by deflation.
To counter the threat of deflation, China’s government may need to implement costly measures to stimulate demand. Current efforts to boost industrial sector loans have not effectively increased overall demand, contributing to the deflationary cycle.
Despite a plan to achieve 5% real GDP growth by 2024, China’s economic outlook is at risk due to deflationary pressures. Analysts suggested potential fiscal support for housing and welfare programs to reinforce the real estate sector and savings.
The ongoing battle with deflation in China has global implications, impacting core Inflation in the US and the Eurozone. This has influenced central banks in these regions to consider interest rate reductions as a response to the disinflationary pressure exported by China.
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Emma Collins, graduated in Financial Economics from the University of Chicago in the USA in 2016. She has since worked at an asset management firm in New York, where she specializes in investment strategies and portfolio management. Emma has a keen interest in financial analysis and has published several articles in renowned financial journals. Her work focuses on providing actionable insights to investors, and she is known for her forward-thinking approach to managing financial portfolios.
