A Specter is Haunting China: Deflation

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Just when you thought the economic news out of China couldn’t get much worse (see any number of previous posts including Austin’s last), along comes a new threat: deflation. Along with plummeting industrial production and exports, inflation–once the specter haunting Beijing (and, yes, that is a reference to the Communist Manifesto) — has suddenly reversed course as dramatically as everything else. The producer price index plummeted from rising at 6.6 per cent year on year to 2 percent in November. The consumer price index meanwhile (which topped 8 percent in February) went  from a 4 percent yearly rate to 2.4 percent. all well and good you might say. These are huge changes but you might wonder if they aren’t a good thing. Falling prices make everything cheaper right? Sadly nothing comes without a downside in the dismal science and too much of a good thing–like falling prices–ultimately leads to all sorts of ills like a deflationary spiral or even the dreaded liquidity trap. (See Wikipedia’s entry on deflation here for some elucidation). Bottom line is that it could cause the consumer, on whom so much is riding in China, to put off buying stuff because it could be even cheaper in a few months. But we really need that consumer out there buying. Economists seem to feel it’s early days to get overheated about possible deflation, but agree that it’s one more reason that the People’s Bank of China will almost certainly have to cut interest rates aggressively again to stimulate the economy.