China is entering a period of price deflation

China’s consumer sector entered a period of deflation and producer prices continued to decline in July as the world’s second-largest economy struggled to revive demand and pressure mounted on Beijing to take more direct stimulus measures.

Concern is mounting that China is about to enter a period of sharp slowdown in economic growth similar to the so-called “lost decades” in Japan, which witnessed stagnation in consumer prices and wages for a generation, which will clearly contrast with the rapid inflation in the rest of the world.

China’s post-pandemic recovery slowed after a rapid start in the first quarter with weak domestic and external demand and the failure of a package of policies aimed at stimulating the economy to support activity.

The National Bureau of Statistics said on Wednesday that its consumer price index fell 0.3 percent year-on-year in July, compared with a median estimate of a 0.4 percent decline in a Reuters poll. This is the first decline in the index since February 2021.

The producer price index fell for the tenth month in a row, declining by 4.4 percent, which exceeded expectations for a decline of 4.1 percent.

China is the first G20 economy to record a year-on-year decline in consumer prices since Japan last reported a negative headline CPI reading in August 2021.

This increases concerns about damage to business between major trading partners.