What’s going on here? China’s inflation reading came in lower than expected this week, suggesting that the country’s teetering on the edge of economy-sinking deflation. What does this mean? Consumer prices in China were just 0.6% higher this August than last. That’s lower than economists expected, even though food prices were pushed up by the effects of bad weather. And when you strip out food and other especially volatile prices like energy, the remaining “core inflation” was 0.3% – the lowest reading in over three years. But remember, while the US and Europe would celebrate smaller price tags, China seems to be heading into a prolonged period of deflation, or falling prices. In fact, by one measure, it’s already there. The so-called “GDP deflator”, which tracks price changes for all goods and services produced in an economy, has shrunk for five quarters. That’s the longest streak in over two decades. Why should I care? The bigger picture: Brace yourself, China. Deflation could pile more pressure on China’s straining economy. See, when prices keep falling lower, shoppers hold off on non-essentials, anticipating cheaper prices with every passing month. That dries up sales for a host of companies, which can force them to scrimp on everything from production to the number of employees on their payrolls. To add insult to injury, deflation makes it harder to keep up with loan repayments, as wages fall while debt stays the same. Zooming in: China’s problem is an expensive one. Economists believe that China’s government will need to push around $1.4 trillion into the economy over two years to force it forward. Plus, they say that financial first aid – more than double the “bazooka” package unleashed after the global financial crisis in 2008 – should target households, not the industrial sector. Otherwise, the newly bolstered industry could start pumping out more products without any new shoppers to buy them, which would push prices down even lower. | 