Imagine a situation where the prices of things you buy, like toys, clothes, and food, are going down instead of going up. This is called “deflation.” It’s kind of like the opposite of when prices go up, which is called “inflation.”
Deflation might sound good because things are cheaper, but it can actually cause some problems for the economy. When prices go down a lot, businesses might have trouble making enough money. This can lead to them cutting jobs or not hiring new people. Also, when things are cheaper, people might wait to buy them because they think the prices will get even lower. This can make it hard for the economy to grow.
However, deflation can occur for various reasons, such as reduced consumer demand, oversupply of goods, technological advancements that lower production costs, or tight monetary policies by central banks. In China, they are dealing with deflation because of reasons that are causing reduced consumer demand and an economic slowdown:
- The government is getting involved in certain industries like technology and real estate, and this can affect how much things cost. e.g. Imagine you have a big box of toys to sell, and the government suddenly says you can only sell a few toys each day. Since you can’t sell as many toys, you might decide to lower the price of each toy to get people to buy them. This is similar to what’s happening in China. The government is making some rules that affect how companies can do business. Because these companies can’t sell as much as before, they might lower their prices to attract more customers.
- They’re trying to stop industries that pollute, but this can make it harder to make things, which might bring prices down. e.g., a factory can’t make as many things as it used to. This means there might be less stuff available to buy. When there’s less stuff to buy, people might not want to pay as much for it, so prices might go down. These industries might slow down or even stop. This reduction in production can lead to lower prices because people might not be willing to pay higher prices for the limited goods available.
- People are getting paid more money for their work, and this can make things more expensive to produce, which might lead to lower prices.
- Consumers become cautious, delaying purchases expecting prices to drop. This reduces demand, prompting businesses to cut production and lower prices to stimulate buying.
- There are tensions between China and other countries, like the USA, which can make it tricky to trade things. This can also affect prices.
- More young people are having trouble finding jobs. The official number says 21 out of every 100 young people between 16 and 24 don’t have jobs. But some experts think the real number might be even higher than that.
- The property business, which used to be a big part of the country’s money-making, has really slowed down. Some important builders can’t pay back the money they borrowed, and lots of building projects are not finished.
- The banks are also having a hard time because they gave money to government groups that aren’t making much money now. And those groups owe the banks a lot of money.
Because of all these reasons, China is having a hard time recovering from the effects of the COVID-19 pandemic. When prices go down a lot, it can make it tough for the economy to bounce back, especially if people aren’t buying as much stuff.
In China, they’re seeing prices go down not only for things that people buy but also for things that companies buy to make their products. This shows that the whole economy is dealing with this problem.
So, even though lower prices might seem good, too much of it can cause some challenges for a country’s economy.
Think of the Consumer Price Index (CPI) and the Product Price Index (PPI) as special tools that help us understand what’s happening with prices.
The Consumer Price Index (CPI) looks at the prices of things regular people like you and me buy every day, like food, clothes, and toys. If the CPI goes down, it means these things are getting cheaper.
The Product Price Index (PPI) looks at the prices of things that companies use to make their products. This could be materials like metal, plastic, or other stuff. If the PPI goes down, it means the cost of making things is also going down.
So, when both the CPI and the PPI are going down, it’s like a sign that prices are dropping for the things we buy and the things companies use to make stuff. This is one way we can tell that deflation might be happening, where prices are going down in the whole economy.
Upsides of Deflation
- Lower Interest Rates: Imagine the bank making it easier for you to borrow money. When things are deflated, they might do this to encourage people to spend and invest, which can help the economy.
- Better for Savings: Think of saving money like growing a plant. When prices go down, your saved money becomes more valuable. This can make people want to save more for the future, which is good for their financial stability.
- Smart Businesses: When prices drop, businesses want to be smart to keep making money. They might find new ways to do things better and cheaper. This can make the economy stronger in the long run.
- Helps People with Fixed Income: Some folks, like retirees who get a fixed amount of money, can actually benefit when prices go down. Their money becomes more powerful, so they can keep living comfortably.
Impact on the world
Think about how a big machine works and one of the important parts of that machine is China. If this part, China starts having problems like prices going down (that’s deflation) and not many people buying things, it can cause trouble for the whole machine.
- Stuff We Use: Many things we use every day, like phones, clothes, and toys, are made in China. If China’s factories slow down, it can be hard for companies in other countries to get the things they need to make their products. This can lead to shortages and higher prices for us.
- Money Power: China is like a very rich friend who spends a lot of money. If they suddenly start spending less money, it affects all the other friends too. China is a big part of the world’s economy, so if they’re not doing well, it can make it harder for other countries to grow their economies too.
- Money Management: When China has trouble, other countries’ money managers (called central banks) also have to make changes. These managers use things like interest rates to control the money flow. But if China is not buying as much, it can make it tricky for these managers to figure out what to do.
So, if China’s economy slows down because of deflation, it can mess up how things are made, slow down the world’s money growth, and make it tougher for countries to manage their money. It’s like a ripple effect that can impact all of us.