A Tale of Two Economies: The World's Inflation vs. China's Deflation

While central banks in the US and Europe are raising interest rates to combat inflation, China is facing the opposite problem: falling prices. In August 2025, China’s consumer price index (CPI) dropped by 0.4% year-on-year, and the producer price index (PPI) fell by 2.9%, continuing a downward trend. Many Chinese businesses, from EV manufacturers to food delivery services, are lowering prices to attract customers in a fiercely competitive market. This price-cutting, known as "involution," pushes prices down without adding value, which can weaken entire industries.

This deflationary environment is fueled by weak consumer demand. After years of strict pandemic lockdowns, many Chinese consumers are saving rather than spending due to concerns about job stability and the ongoing real estate crisis. This shift in consumer behavior, even among wealthier individuals, has led to a rise in second-hand shopping and a general reluctance to make major purchases.

Deflation is a significant concern for the Chinese government because it can create a dangerous cycle. When prices are expected to fall further, consumers and businesses delay spending and investment. This reduces company revenues, leading to production cuts, wage reductions, and layoffs, which further weakens consumer spending. To counter this, the government has introduced stimulus measures like loan subsidies and support for the tourism and dining sectors, while also warning certain industries against excessive price wars.

However, these efforts have had limited success because the issue is deeply rooted in social psychology and a loss of public confidence. China's challenge is to boost consumption and investment while also addressing underlying problems like overcapacity and a stagnant real estate market. Without comprehensive reforms, the world’s second-largest economy could face a period of prolonged sluggish growth and low inflation, similar to what Japan experienced. This contrast highlights the fragile state of the global economy in the post-pandemic era, with major powers facing two very different, but equally challenging, economic dilemmas.