The lower inflation rate of China compared to other major developed economies may be largely due to differences in the country’s economic cycle and other factors.
Global inflation
Recently, inflation in the US and the European Union has risen significantly, with the US CPI exceeding 7.5% for 6 consecutive months and the euro area CPI reaching a new high of 10.7%. Over the past year, due to the impact of global low liquidity, supply chain bottlenecks, and instability in Ukraine, global inflation continues to rise to its highest level in nearly 40 years and has become the most severe inflationary period since the 1970s.
Meanwhile, as countries reverse global COVID-19 relief measures and implement tighter monetary and fiscal policies to deal with inflation, all of this has caused the global economic growth to continue to slow down. Compared to the 1970s, the current global inflationary period is related to a large number of countries, with major developed countries – represented by the Organization for Economic Cooperation and Development – experiencing varying degrees of inflation.
Among them, the US, UK, Germany, Italy, and Russia are experiencing the most significant inflationary period. Furthermore, the level of inflation is quite high. Inflation in OECD countries currently remains above 8%, on par with the “Oil Crisis” of the 1970s. In addition, global liquidity is facing significant issues. After the COVID-19 outbreak, global interest rates in developed countries have fallen to their lowest levels since World War II.
Firstly, commodity prices have been rising. Comparing the period before the COVID-19 outbreak to the end of August this year, crude oil prices increased by 31%, natural gas by 296%, wheat by 48%, and copper by 33%. The prices of energy, food, and other commodities have all increased significantly.
Under pressure from carbon reduction efforts, EU countries have increased the use of natural gas and other sources of energy to replace and ultimately phase out coal energy, leading to the sharp increase in prices of natural gas, crude oil, and other commodities.
Secondly, there are global expansionary policies. To cope with the impact of COVID-19, about 40 central banks around the world have cut interest rates more than 50 times since March 2020, with the US Federal Reserve, Bank of England, and Bank of Canada cutting their policy rates to near zero, and emerging economies have also implemented rate cuts.
Inflation in China
Unlike major developed countries experiencing varying levels of inflation, China’s economic growth has slowed down, but its inflation rate is relatively moderate. As of the end of October, China’s annual accumulated increase in the 2022 consumer price index was only 1.9% – significantly lower than the 8.3% in the US and 7.6% in the eurozone.
China’s inflation rate is much lower than that of major developed economies, mainly due to the following three factors. Firstly, the difference in China’s economic cycle with Europe and the US, and the decline in China’s domestic demand, which has limited the overall price increase.
Secondly, the current global inflation is mainly due to the sharp rise in commodity prices, which is affecting China’s economy in the form of imported inflation, as evidenced by a significant increase in the producer price index.
Finally, the “basket” of China’s CPI and the CPI basket of major developed economies have significant differences. In China’s CPI basket, sectors such as housing and food have a large weight, but price increases do not create much pressure in these sectors.
At the same time, thanks to China’s expanded fiscal and monetary policies, the Chinese economy is gradually stabilizing. Most importantly, with China updating its COVID-19 prevention and control measures, a stronger momentum will emerge in the Chinese economy and will receive a strong corresponding response from the country’s capital markets.
On the contrary, excessive inflation will force the US, UK, and EU to implement strict monetary policies, which can also have negative effects such as bursting the global asset bubble and causing an international debt crisis.
Affected by tighter liquidity, global interest rates rise and economic growth slows down, which could cause high-debt countries to experience an economic crisis. Among them, emerging markets with fragile domestic economies, sharp exchange rate declines, high short-term debt, and political instability are more likely to experience a high debt crisis.
Recently, the World Trade Organization estimated that global trade will slow down even further in 2023, with only a 1% increase and warning that “some key countries are at risk of falling into recession.” In summary, the global economy has experienced a stagnant inflation crisis, and the Chinese economy is slowly recovering.
According to the author of China Daily, China’s role in the global economy will be crucial. At the G20 summit in November, China and the US both emphasized the need to enhance cooperation, coordinate macroeconomic policies, and promote global economic recovery and development. The history of economic development shows that the painful impact of stagnant inflation is significant. It requires the joint efforts of all countries to overcome the economic recession caused by stagnant inflation.