Despite relaxing pandemic-era restrictions, consumer prices, which slipped into the negative territory in 2021, have been on the brink of deflation for quite some time as China's economic momentum failed to rebound China’s economy has fallen into deflation after consumer prices sunk for the first time in two years while factory gate prices extended their declines as the country struggles to maintain its title of the world’s second-largest economy. The consumer price index (CPI) in the month of July dropped by 0.3 per cent on a year-on-year basis. Meanwhile, the producer price index (PPI), a metric that gauges the prices of goods as they leave factories, nosedived by 4.4 per cent in July. It was the first year-on-year decline since February 2021. CPI was unchanged in June. Despite relaxing pandemic-era restrictions, consumer prices, which slipped into the negative territory in 2021, have been on the brink of deflation for quite some time as China’s economic momentum failed to rebound. “Both CPI and PPI in year-on-year terms fell into negative territory and confirmed economic deflation,” said Xing Zhaopeng, senior China strategist at ANZ. Xing expected the CPI to hover around 0 in the second half of the year, saying “It would be hard to manoeuvre monetary policy. The Politburo meeting called for a stable yuan exchange rate, which would conflict with monetary easing.” According to a report by Financial Times, Eswar Prasad, a China finance expert at Cornell University, said, “The Chinese economy is now at serious risk of sliding into a deflationary episode that could spark a self-reinforcing downward spiral in growth and private sector confidence.” Meanwhile, the Chinese government has aimed at an average inflation rate of three per cent over the course of 2023. What is deflation? By definition, deflation is a phenomenon when both consumer and asset prices decrease over time while purchasing power increases. In simpler terms, it is the exact opposite of inflation, when prices of goods soar across the economy. An economy that witnesses deflation usually highlights the country’s impending recession and hard economic times. According to Forbes, when people see that prices are set to make a freefall, they delay purchases in the hopes of buying things at lesser prices at a later point in time. This, however, translates to lower income for producers which in turn leads to higher interest rates and unemployment. What caused China’s deflation? China, which witnessed a major economic boom after it ended its zero-COVID policy, has lost all its momentum. Imports into China shrunk by 12.4 per cent in July, highlighting the country’s tumbling domestic demand. The international demand for Chinese goods has also seen a downward trend owing to the threat of recession in the US and Europe. With youth unemployment at an all-time high and a sluggish property sector, authorities are introducing multiple policy measures to deal with the catastrophic economy. China’s Politburo — the top decision-making institution for the Chinese Communist Party’s Central Committee — promised change but also warned that it now faces “new difficulties and challenges” as well as “hidden dangers in key areas.”