Jul 11, 2023 - Economy

China's economic woes may help lower U.S. inflation

Illustration of the flag of China as a chart with the stars creating a ripple effect

Illustration: Sarah Grillo/Axios

China's economic pain may be the Fed's gain.

Why it matters: The country's economic slog could indirectly help the U.S. bring inflation down.

The big picture: The People's Republic, the world's second-largest economy, continues to struggle to shake off COVID-induced woes, leaving it tottering on the brink of deflation — or falling prices.

The latest: New Chinese price data out Monday was weaker than expected, with the country's consumer price index dead flat — that's an annual gain of 0% — over the last year.

  • Producer prices — prices at the factory gate, which are typically seen as a leading indicator of consumer prices — are deeply negative, falling 5.4% compared with June 2022.

Be smart: Deflation can act as a brake on economic growth, as falling prices push consumers and businesses to delay purchases and investments because they expect things to be cheaper in the future.

  • If enough people do this at once, you have a major economic downturn.

Between the lines: What happens in China — the world's largest exporter and industrial hub — doesn't just stay in China.

  • Its weak economy has resulted in a weak currency, meaning its exports are falling in price for foreign buyers, like those in the U.S.
  • And if the country's economic engine continues to sputter, it will consume fewer raw materials, putting downward pressure on commodities prices — key drivers of short-term swings in consumer prices in the U.S.

What they're saying: "Chinese supply and demand shocks affect prices in other countries significantly," wrote economists from Germany's central bank in one of the best studies of the phenomenon.

What to watch: If the Chinese government — which has been slow to launch the kind of massive infrastructure spending push it once used to juice growth — decides it has to get more aggressive in stoking the economic engine.

  • That could reinvigorate raw materials inflation, reversing some of the recent downward pressure on U.S. consumer prices.
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