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Customers shop for vegetables and fruits at a supermarket in Fuyang, China, on February 8, 2024.
new york
CNN
—
us market It shook on Tuesday January’s consumer price index showed higher-than-expected inflation, leading investors to believe that a rate cut is unlikely in the near future.
Markets aside, this data confirms that prices are indeed still high and are costing Americans dearly. Just ask anyone who recently purchased new car insurance (premiums have increased 21% from a year ago).
However, China has another problem. Prices are falling at current levels. fastest speed within 15 years.
no, it wasn’t typoThis becomes a problem when falling prices are widespread throughout the economy, as in China, which is suffering from so-called deflation.
At first glance, falling prices may sound like a good thing. After all, who doesn’t like paying more for something?
But the problem with deflation is that once people start expecting prices to fall in the future, there is little incentive to buy now. For example, unless you absolutely have to, why buy a new oven today if you think the price will drop significantly in a month?
If more people think that way, their spending will drop significantly. If that means businesses can’t afford to hire more workers, it could cause a recession.
Deflation has hit stock prices hard in China, with the stock market having the worst performance in the world last year. As a result of this, the country’s sovereign wealth fund buy stocks The aim is to raise prices for Chinese listed companies.
Additionally, China is promoting economic stimulus measures aimed at: Expansion of consumer spending.
The surge in inflation that Americans and people in many parts of the world have been experiencing over the past few years, largely due to pandemic-related factors, is not what central banks want.
Like the U.S. Federal Reserve, most central banks target an annual inflation rate of 2% rather than zero. This is done to prevent people from delaying their purchases.
It also gives central banks some cushion against deflation.
“There are limits to how much interest rates can be cut, so it is important to have some headroom against deflation,” the European Central Bank said in a post on its website. “In a deflationary environment, monetary policy may not be able to sufficiently stimulate the economy through the use of interest rate instruments. This makes monetary policy more difficult to fight deflation than it is to fight inflation.”
