January’s Inflation Rate Slows to 1 Percent

Posted by Reading Time: < 1 minute

Feb. 10 – China’s Statistics Bureau announced that inflation rate for January slowed to 1 percent, the slowest pace in more than two years while producer prices dropped by 3.3 percent.

Last year, China’s CPI for December increased by 1.2 percent. The slowing inflation rate gives policymakers more reason to implement interest-rate cuts to revive domestic demand and exports.

The situation has not been confined to China as lower commodity prices and weaker demand around Asia are placing governments on high alert for the threat of deflation.

“This puts more pressure on the central bank to cut interest rates further,” Peng Wensheng, head of China research at Barclays Capital in Hong Kong told Bloomberg. “In the short term, the downward pressure is on prices.”

Deflation occurs when there is a constant decrease in the price level of goods and services and when inflation reaches below zero percent. This leads to an increase in the real value of money and a negative inflation rate.

Episodes of deflation are considered problematic because it can lead to a deflationary spiral seen during the Great Depression.

Moreover, there is a tendency for currencies to weaken when inflation slows and interest rates drop. When this collectively happens, regional currencies will suffer and decrease even more.

The threat of deflation, “is not just an Asian problem, but a global one and must be addressed wherever possible by appropriate policy responses,” says Patrick Bennett, Asian foreign-exchange and rate strategist for Société Générale told WSJ. “The fiscal and monetary policy ammunition available to Asia should be ample, but needs to be delivered in a timely fashion — i.e., now.”