Deflationary Pressure in the PRC

A quick note. As The Wall Street Journal writes, the People’s Republic of China is facing the threat of economic deflation.

Prices charged by Chinese factories that make products ranging from steel to cement to chemicals have been falling for months. Consumer prices, meanwhile, have gone flat, with prices for certain goods—including sugar, eggs, clothes, and household appliances—now falling on a month-over-month basis amid weak demand.

There are a number of causes for the nation’s falling prices, including to some extent, the deflationary pressures being relative to the inflation spike that the PRC experienced as the world came out of the economic dislocation the Wuhan Virus Situation engendered.

However, there’s another factor—a critical one IMNSHO—that pushes for deflation in the PRC. That factor is the nation’s shrinking population. With fewer people even available to buy things, demand necessarily must fall, and if the supply of goods and services doesn’t fall commensurately, prices will come down. If those prices already are flat, or falling, then they’ll only fall further. With that lessened demand, the only way producers can stay in business is to reduce production—to reduce payroll costs, either by reducing pay, laying off workers, or some combination of the two. That reduced income will drive further reductions in demand.

Deflation sets in, and it deepens.

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