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China’s Falling Prices Could Help Inflation in the Rest of the World

Miguel A. Rodriguez
Miguel A. Rodriguez
10 August 2023

More data from the Chinese economy yesterday could show that China’s economy has technically entered into deflation. The inflation data showed that consumer prices fell in July, which could lower profits for producers while lowering inflationary pressure around the world as Chinese exports become cheaper. 

China consumer prices fell in July

Yesterday's release of China's inflation data put this country back in the limelight on the financial markets.  

China’s Consumer Price Index (CPI) showed yesterday that Chinese consumer prices decreased by 0.3% in July compared to the prior year, therefore the country is technically experiencing deflation.

While China's deflation may reduce inflationary pressure elsewhere as Chinese goods become more affordable, it might also cause problems for the global economy. A flood of cheap Chinese goods runs the risk of damaging employment possibilities and cutting into the earnings of international producers.

Will China need economic stimulus measures?

Additionally, the fact that China's CPI is moving in a negative direction serves as a warning that its economy is weak, and as it is an engine of the world's economy, this might have a detrimental impact on global growth. In contrast to Western nations, where the opening of the economy following the end of the pandemic put tremendous upward pressure on prices, China has experienced the opposite process, and all signs point to the need for extraordinary economic stimulus measures to keep the country from experiencing an economic slowdown similar to what Japan experienced in the 1990s. In fact, certain aspects are similar, such as the crisis in the real estate sector, which is still far from being resolved and is currently being reported on by new enterprises that are struggling in the industry.

Investors rushed towards treasury bonds  

Investor risk sentiment did not improve in response to this bad news, and the previous sessions' risk aversion persisted.  

At times like these, treasury bonds tend to become a refuge for investors and therefore purchases were maintained yesterday despite a small drop in bond yields. This shift was also influenced by remarks made by some Federal Reserve (Fed) officials who hinted at a break in interest rate hikes at the September meeting.

Markets look to the release of the Consumer Price Index (CPI) today  

Considering recent economy events and these comments by some Fed officials, the release of the US CPI data today is highly relevant. Although headline CPI is expected to increase, economists predict a modest improvement in core CPI.

If the drop in core CPI is not significant, the likelihood that the Fed will not continue to raise rates will most likely be reduced given the resilience of the labour market.  

In this risk-off scenario and in anticipation of today's IPC data, the North American indices remained under downward pressure, especially the Nasdaq, which was particularly impacted by the significant declines of the semiconductor manufacturer Nvidia Inc., which fell further by 5%. 

DMO 10.8.2023 graph.png

NIVIDIA Corporation monthly chart, August 10, 2023. Sources: Bloomberg, Reuters

Key Takeaways

  • China’s consumer prices fell –0.3% in July compared to last year.
  • Technically, China’s economy could be considered as in deflation mode.
  • China’s falling prices could help alleviate inflation in other parts of the world.
  • China’s economy may need the help of stimulus measures for it to begin to grow.
  • Investors continued to avoid risk yesterday and sought refuge in treasury bonds.
  • Some Fed officials pointed to a pause in rates at the September meeting.
  • Anticipation is mounting for the release of the US CPI today.
  • North American indices were under pressure.  

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Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.