Reflation or Deflation in 2021?

China’s consumer prices will continue to face disinflationary pressures this year, as the current economic rebound has been driven by stronger output growth relative to final demand and household consumption.  Rising asset prices are also widening China’s income imbalances, hurting consumption and weakening consumer price growth. The central bank has stepped up monetary easing efforts since December but is still behind the curve, and there is a risk that deflationary pressures could become entrenched. The recent rebound in producer prices has been driven more by global factors such as the falling US dollar, rather than stronger Chinese domestic demand.  The central bank is more likely to respond to trends in consumer prices, as periods of CPI deflation have been extremely rare in China’s recent history.

Posted January 25, 2021
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