Chart of the Week: China slips into deflation

China’s CPI has tumbled into negative territory in July with prices falling 0.3% relative to a year ago, sparking deflation fears. The Chinese economy is battling a cyclical slowdown after its disappointing reopening earlier this year. Beijing does not publish the weights of its CPI basket, but Fathom estimates suggest that the main contributors to this fall were plummeting energy and food prices, while the categories related to the services sector continued to contribute positively as they have done throughout the recovery period. Fathom’s findings suggest that supply factors (especially in pork prices) tend to be the main drivers of Chinese inflation, with demand components having only a small impact. This is because historically, variations in pork prices have been driven by fluctuations in supply, reflecting the impact of diseases such as swine flu, rather than by changes in demand. Therefore, claims that it is the weakness of the economy that has pushed China into deflation appear inaccurate; in fact, core inflation (which excludes food and energy prices) continues to register positive growth rates and even accelerated to 0.8% in July. Going forward, to understand where China inflation is heading, the outlook for commodity markets will be the key thing to watch. Tentative evidence that oil prices may have reached a floor, coupled with an increasing risk of livestock feed shortages stemming from geopolitical tensions, mean that the recent deflationary slump is likely to be transitory.

Refresh this chart in your browser | Edit the chart in Datastream

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

Join a growing community of asset managers and stay up to date with the latest research from Refinitiv and partners to help you inform your investment decisions. Follow our Asset Management LinkedIn showcase page.