China’s GDP Price Gauge Turns Positive After Years of Deflation

Visitors on the waterfront in Dalian, China Photographer: Qilai Shen/Bloomberg Photo by Qilai Shen /Bloomberg

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(Bloomberg) — A key metric of China’s inflation turned positive for the first time in three years as a jump in oil prices put an end to a record streak of deflation.

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The so-called GDP deflator, which measures the extent of price changes across all domestically produced goods and services in the economy, increased 1.6% in the second quarter, according to Bloomberg calculations based on government data released Wednesday. The official figures on gross domestic product showed the economy slowed in the April-June period to the weakest pace in more than three years.

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The positive figure is a significant milestone in exiting a spiral of declining prices due to manufacturing capacity far in excess of consumer demand. But economists warn that reversal may not be sustained as price increases are largely limited to oil and sectors linked to artificial intelligence.

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What Bloomberg Economics Says…

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“Unlike Japan, China has lower oil dependence, a resilient currency, a persistent domestic supply glut and widespread underemployment. Those structural differences mean an external energy shock won’t create the self-sustaining wage-price cycle needed to end deflation. China’s deflation is a domestic demand disease. It needs a domestic demand cure.”

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— Chang Shu, David Qu and Taro Kimura.

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The GDP deflator shows how much of the increase in non-inflation adjusted growth is due to higher prices rather than greater economic activity. China’s statistics authority doesn’t publish the official deflator, and economists calculate it by subtracting real GDP growth from nominal growth.

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The latest figures suggest the economy’s overall prices have risen slightly from a year ago, likely due to a rebound in factory inflation driven by global commodity prices including oil and metals.

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China has largely shielded itself from the massive run-up in oil prices stemming from the war in Iran through its own reserves — the biggest strategic inventory in the world. It’s also importing less oil, with inbound shipments sinking in June to a 10-year low.

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Data out last week showed that consumer inflation and the core gauge of prices both slowed more than expected in June from a year earlier, a sign that China’s reflationary momentum is peaking. With Middle East tensions still high and oil prices flaring up again, it’s possible that China could experience some fresh inflationary pressure at least in the near term.

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—With assistance from Yujing Liu.

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