As the developed world starts to recover from the inflationary pressures sustained over the last year, observers are now becoming increasingly wary of deflation.
Deflation involves a sustained fall in prices, and possesses disastrous economic consequences. Primarily, this involves a deflationary spiral wherein consumers begin delaying purchases due to expectations that prices will fall further, thus dampening demand. Hence, this results in falling business revenues, production, job losses and wage cuts.
With China’s July consumer price index falling by 0.3% and producer price index falling by 4.4% compared to 2022, deflationary concerns are on the rise. This stems from the fact that China is already struggling to recover economically after its Zero-Covid policy, with a deflationary spiral only further dampening demand. Thus, if manufacturing levels were to continue decreasing, this puts China at risk of experiencing a ‘Lost Decade’ much like Japan in the 1990s.
Nonetheless, indicators show these concerns about global deflation are still minimal as international organisations such as the IMF continue to forecast global inflation to reach 5.2% in 2024, which is still beyond most advanced economy central banks’ inflation target of around 2%.