As prices fall, how real is the risk of deflation?

index growth rate for January was 0.8 percent, the lowest since 2009; and the latest data from the Ministry of Commerce shows the sales of 5,000 key retail enterprises fell by 4.7 percent in January. Is there a danger of deflation for the Chinese economy? Comments:

Commodity prices rise and fall; we cannot equate every drop in prices to deflation. Deflation refers to generally falling commodity prices that affect consumption and in turn curb economic growth. Currently the CPI shows commodity prices are low, but that’s a result of the lower oil prices, which have not curbed consumption; therefore it is too early to predict that deflation is coming.

China has huge currency and credit supply, but surplus capacity and ineffective investment, which do not contribute to economic activities, account for a high percentage of them. Thus the liquidity in the market is relatively insufficient, which might bring deflation.

The low CPI growth rate in January has unique causes, namely the sufficient supply of vegetables and other main foods thanks to warm winter, and the falling prices of pork, which is a massively consumed agricultural product in China. It is highly possible the CPI will rise again in February, thus alleviating the worry about deflation.

The CPI growth rate has fallen so fast that economists generally did not expect it. That’s because the prices of foods and production goods have both fallen abruptly, embodying the weak economy and high pressure of deflation in the coming future. We have already lowered our economic performance prediction.