The Year of Disinflation

"Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair."

Sam Ewing

China in deflation

Over the next few pages, I will argue that consumer price inflation (CPI), which is now falling rapidly across the OECD, will soon return to levels that central bankers are comfortable with. I don’t expect the rate of inflation to return to 2% any time soon, but I suspect we will reach 3% relatively quickly, and that 3% will be enough to make central bankers start easing.

In China, the picture is very different. Chinese producer price inflation (PPI), which is a powerful leading indicator of CPI, turned negative more than 12 months ago and has been negative since. Chinese CPI has fallen dramatically as a result and has also turned negative more recently.

The fact that China is now struggling with deflation (again) raises loads of questions and is an important part of the puzzle, as China has been an exporter of deflation in recent years; however, space limits do not allow me to go into any level of detail on that topic today.

Before I move on, allow me to make one comment on China, though. The facts that China is a big exporter of deflation, and that Chinese inflation has turned negative again, will indeed provide a helping hand to central bankers in the OECD, keen to bring CPI in their own country/region further down.