Why are the prices so cold? What are the dangers of deflation? In this section, we focus on the important topic of price.
When talking about economic growth, GDP, and prices, many people think that these are too macro and have nothing to do with themselves. But in fact, food, clothing, housing and transportation in our lives are closely related to prices; to put it bluntly, the income and salary of corporate employees and the number of jobs in the market are also closely related to prices.
Look at the data first: The latest August CPI (Consumer Price Index) released by the National Bureau of Statistics fell by 0.4% year-on-year compared with the same period last year.
The last time I paid attention to prices was when economic data was released in the first half of the year - although GDP growth in the first half of the year was eye-catching, the sluggish price was a clear "flaw": from January to June 2024, CPI fell by 0.1% year-on-year compared with the same period last year.
The focus is on prices again now, because the new data of CPI falling by 0.4% year-on-year in August; if divided by urban and rural areas, the CPI in urban areas fell by 0.3%, while rural areas fell by 0.6%. Seeing such data, many people will ask: Why are prices so cold?
From an economic perspective, prices have experienced significant year-on-year declines, which often means that deflation has gradually emerged. So what are the dangers of deflation?
To understand this, we can first disassemble the composition of the August CPI decline by 0.4% year-on-year - to see which categories have lowered prices, we can initially understand the direct impact of deflation.
According to the statistical caliber of the National Bureau of Statistics, CPI covers eight categories of goods and services. In this decline in prices, food prices fell by 4.3% year-on-year, while non-food prices rose by 0.4% - Obviously, the decline in food prices is the most direct reason for the decline in prices. Did Chinese food consumption decrease in August?
Let's look at the "food, tobacco and alcohol" in the eight categories: the price of this category fell by 2.5% year-on-year, directly lowering the CPI by about 0.72 percentage points. You should know that the overall CPI fell by only 0.4% in August, which means that the decline in food, tobacco and alcohol prices is the "main reason" of the decline in prices.
Further disassemble the decline in food, tobacco and alcohol: vegetable prices fell by 15.2% - vegetable farmers planted land of the same area and produced vegetables with the same output, and their income would inevitably be greatly reduced; egg prices fell by 12.4% - households who rely on breeding poultry and selling eggs decreased by 12.4% year-on-year, and profits shrunk significantly after deducting costs; livestock and meat prices fell by 8%, of which pork prices fell by 16.1% - rural pigs and cattle farmers would obviously suffer losses; in addition, fresh fruit prices fell by 3.7%, and grain prices also fell by 0.8% year-on-year.
It can be seen that the prices of core food categories generally fell sharply in August, and the most direct injured group was the majority of farmers. By disassembling the macro data of deflation into specific categories, you can clearly see who is suffering the most direct impact.
In addition to rural groups, urban areas will also be affected by cold prices. Most people in cities do not directly engage in agricultural production, but the "changes in supply and demand relationships" reflected by the decline in prices will still penetrate into all aspects of the urban economy. Supply and demand determine prices: Oversupply or weak demand may lead to price declines.
For any reason, if the city's shopping malls, supermarkets and other retail companies sell the same amount of goods, their year-on-year revenue will definitely decrease and their profits may be greatly eroded.
In other words, even if the total GDP is the same as last year, the decline in prices will directly affect the company's efficiency; the damage to the company's income and profits will further affect the employees' salaries, wages and bonuses. If the company continues to "lose money and gain publicity", it may also affect the stock prices of listed companies and affect ordinary investors in the capital market.
The question is: How should we deal with it in the face of cold prices and deflation?
Monetary policy is a common tool, but it has limitations in the regulation of prices. We often compare monetary policy to a "rope": if prices rise, they can "pull" the price increase rate by raising interest rates; but if prices fall into deflation and market demand is sluggish, it is often difficult to achieve if they rely solely on "rope push" to boost animal prices. - relying solely on monetary policies such as interest rate cuts, the effect of dealing with deflation is very limited.
In this case, a more effective way is to increase residents' income: the state can directly improve residents' purchasing power by increasing pensions, increasing subsidies for low-income groups, and increasing the salary and benefits of financial support personnel (such as civil servants and employees of public institutions).
In addition, increasing central fiscal expenditure is also a mainstream macro-control method in the world: when enterprises and households are insufficient in purchasing power, the central government can expand expenditures, increase consumption and increase animal prices by replacing market entities, thereby improving corporate profitability and promoting the economy to shift from a deflation state to a moderate and normal development track.
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