Conversely, inflation diminishes consumers’ purchasing power, reducing spending, a significant driver of economic growth. The relationship between my $4.50 plate of chicken rice and the official inflation figures reflects the tenuous connection between deflation and China’s economic downturn. My experience in four major cities in China in December certainly did not support the deflation narrative. Everybody was complaining about rising prices.
Singapore inflation is officially at 3.3%, but my $4 chicken rice was difficult to find, reflecting the 12% food price rise over the past two years. While we desire a lower inflation rate, deflation is China’s largest economic threat, surpassing even the Evergrande collapse.
The economic textbooks tell us that deflation is bad because falling prices lead to lower consumer spending, a major component of economic growth. Companies respond to falling prices by slowing production, leading to layoffs and salary reductions. This further lowers demand and prices.
