China’s Inflation Soft-Patch to Transition into Hotter Environment, Surging Inflation Ahead: Expert Analysis
China’s inflationary situation is currently in a soft-patch, but experts predict that it will transition into a hotter environment in the near future. The prevailing narrative that China will export deflation and push other central banks to adopt dovish policies is wishful thinking, according to these experts.
While there are challenges facing China’s economy, such as property market issues, the shadow banking system, and an aging population, these factors do not necessarily indicate a dangerous deflationary problem. It is important to clarify the definition of deflation as a sustained, economy-wide decline in prices that affects behavior and investment decisions. China is nowhere near experiencing deflation by this definition.
The drop in consumer prices in July, which sparked deflation talk, was mainly due to year-ago base effects. Inflation quickly turned positive after previous episodes of consumer price drops. In fact, core inflation last month was the highest for July in this century, and food prices helped keep overall consumer prices down. Excluding food and energy, consumer prices were up by just under 1%, indicating a soft but not falling inflation rate.
Furthermore, consumer prices are not expected to continue falling. Consensus forecasts predict a return to 2% inflation next year, and inflation expectations remain firm. There is little evidence of significant asset deflation, as evidenced by relatively stable house prices and equity indices that have experienced corrections but not collapses.
Chinese economic leaders have substantial room to apply stimulus measures if deflation becomes a real threat. The People’s Bank of China has not embraced quantitative easing like other major central banks, and it has the capacity to lower policy rates and inject liquidity if needed.
Looking ahead, forward-looking indicators suggest that China will transition out of its inflation soft-patch and into a hotter environment. The depreciation of the yuan against the U.S. dollar and key commodity price movements are expected to drive inflation higher in the coming years. China’s strategic actions, such as capitalizing on Russian oil discounts and undermining Western sanctions, may also contribute to higher inflation.
In conclusion, while China is currently experiencing a soft-patch in inflation, evidence suggests that it will transition into a hotter environment with surging inflation ahead. However, it is important to note that China is not facing a deflationary spiral and has the capacity to employ stimulus measures if necessary. The future inflationary environment in China will be influenced by various factors, including exchange rate movements, commodity prices, and geopolitical tensions.
