As Fed Battles Inflation In US, China's Zero Inflation Sparks Deflation Fears: Report

China’s consumer inflation rate dropped to zero in June, while factory-gate prices continued to decline, indicating persistent demand weakness and raising concerns about potential deflation in the economy, Bloomberg reports.

Slowing Inflation and Falling Producer Prices

The National Bureau of Statistics revealed that the consumer price index remained unchanged last month from a year earlier, falling below the expected 0.2% increase. Core inflation, excluding volatile food and energy costs, also slowed to 0.4% from 0.6%. Producer prices fell by 5.4% in June, compared to a 4.6% drop in May, exceeding the anticipated 5% decline.

See Also: Is China Going Into A Recession? Country’s Tiny Inflation Rate Has Economists Worried Of A Japanese-Style Lost Decade

Deflation Concerns and Economic Measures

These inflation figures add to the growing evidence of a cooling economic recovery. The threat of deflation has been increasing, impacting confidence levels. Producers are already grappling with lower commodity prices and weak demand domestically and internationally. If consumers and businesses continue to withhold spending or investment in anticipation of lower prices, it could trigger a self-fulfilling price-dropping spiral.

Government Response

Despite calls for Beijing to take action to support the economy, most measures have been limited. The central bank made a minor cut to a key policy interest rate last month, and the government extended tax breaks for electric car buyers. Premier Li Qiang discussed potential aid with Chinese economists, emphasizing that policies would be “targeted, comprehensive and well-coordinated”, suggesting that any stimulus would not be massive.

In The US

Meanwhile, investors in the U.S. are turning their attention to a crucial inflation report scheduled for Wednesday, seeking further insights into the state of the economy following the recent June jobs report, which indicated a slight cooling but still-hot picture of the labor market. In June, the labor market fell short of economists’ predictions with the addition of only 209,000 jobs, marking the smallest monthly gain since a decline in December 2020. This figure fell below expectations for a net gain of 225,000 jobs.

Economists forecasts a 3.1% rise in consumer prices in the U.S. for the year ending in June, indicating a slowdown compared to the 4% annual increase recorded in May.

James Ragan of DA Davidson, Director of Wealth Management Research, suggests that the June CPI report is unlikely to alter the Federal Reserve’s interest rate trajectory, reported CNN.

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