- The situation looks like a win-win
- But political tensions mean an export-led recovery looks increasingly unlikely
China is bucking the trend: as much of the world battles high inflation, annual consumer price index (CPI) inflation is just 0.2 per cent. This has seen Chinese policymakers cut interest rates, and has global implications too: thanks to China’s economic clout, low inflation has the potential to ‘spread’ beyond the country through low-priced exports, putting some much-needed downward pressure on global inflation rates. But (as is so often the case), politics seems to be getting in the way of a neat economic theory.
Economists think that Chinese inflation could yet fall low enough to turn negative, tipping the economy into deflation. As the chart below shows, producer price index (PPI) inflation (which gives us an indication of what’s coming down the pipeline) is already below zero, and Barclays analysts expect the headline rate of CPI to tip into deflation later this year. As central bankers in advanced economies fret about the lack of ‘slack’ in the economy, the low Chinese inflation rate implies that the economy is still working comfortably below full capacity.