China’s June inflation data unexpectedly turned downward: headline inflation was 0.0%, Bloomberg consensus was up 0.2% YoY; PPI was -5.4%, consensus was -5.0%.
The price level is shown in Figure 1, and the year-on-year inflation is shown in Figure 2:
figure 1: China CPI (black), core CPI (tan) and PPI (green), all logarithmic, 2019M12=0. ECRI defines the peak-to-trough dates of recessions as pink. source: Kose/Unworried – World Bank IMF, IFS, both updated using TradingEconomics; and author’s calculations.
figure 1: Year-on-year inflation rates for China CPI (black), core CPI (tan) and PPI (green). ECRI defines the peak-to-trough dates of recessions as pink. source: Kose/Unworried – World Bank IMF, IFS, both updated using TradingEconomics; and author’s calculations.
Why worry about deflation? Bloomberg Pointing out that deflation can be seen as a sign of slowing economic activity, which is a big concern given the weaker-than-expected rebound after the end of the zero-coronavirus policy regime. (In some preliminary regressions, I find that a 1 ppt output gap defined using the HP filter leads to an increase in inflation of 0.44 ppt over the period 1990-2019 after controlling for lagged inflation).
Then there is the fact that producer price index (PPI) inflation continues to be negative. While it is tempting to conclude that lower PPI inflation will lead to lower CPI inflation, the evidence to support this view is mixed; Sun et al. (2021; return International JFE 2023). The 2010-2019 Granger causality test shows that we cannot reject the hypothesis that “PPI monthly rate inflation does not lead to CPI inflation”, nor the hypothesis that “CPI does not lead to conventional level of PPI inflation”. On the other hand, we can reject the null hypothesis that PPI does not cause core CPI inflation to average 10%.
