China's consumer price index fell by 0.5% in November, marking the largest drop since the beginning of the pandemic. While this is a concerning trend for China, analysts suggest that it could have positive implications for the West. The deflationary pressure in China could help to restrain inflation in countries like the US.
The longer China's economic recovery is delayed, the more likely it is that inflation expectations in the West will decline. There are concerns that China could export its deflation to the rest of the world through international trade. Thierry Wizman, a strategist from Macquarie, believes that if China continues to struggle, inflation expectations in the West will decrease.
China's consumer price index decline comes at a time when US consumer inflation is also slowing down. In November, US consumer inflation decreased to a 3.1% annual rate from 3.2% the previous month. While this slowdown is generally welcomed on Wall Street, it still exceeds the Federal Reserve's target of 2%. The inflation figures are closely monitored by American investors who are trying to predict when the Federal Reserve will begin to lower interest rates.
Analysts, like Albert Edwards from Societe Generale, view China's deflationary data as a relief for the West. They suggest that the West would benefit from importing some of China's price declines. Edwards believes that China's deflation could serve as a welcome restraint on inflation in the West.
The deflationary trend in China is not surprising, given the country's economic challenges, including a struggling property sector, a decrease in foreign capital, and slow post-pandemic growth. In contrast, the US continues to experience healthy GDP growth. However, a sudden reversal in the US could turn Chinese deflation into an obstacle rather than a benefit.
Overall, China's deflationary trend has the potential to impact the West by restraining inflation. However, the outcome will depend on various factors, including the state of the US economy. While some analysts see China's deflation as positive for the West, others caution that it could create complications if the US experiences a hard landing.