Data due on Sunday at 0130 GMT, which is 2030 US Eastern time on Saturday is expected to show Chinese inflation (CPI) barely stumbling along above deflationary territory:
Deflation—when prices decline over time—can be harmful to an economy for several reasons:
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Delayed Spending and Investment – Consumers and businesses may postpone purchases and investments, expecting prices to fall further. This weakens demand and slows economic activity.
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Rising Debt Burden – Since wages and incomes typically decline during deflation, the real cost of repaying debt increases, making it harder for households and businesses to manage their obligations.
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Lower Corporate Profits – As prices drop, businesses earn less revenue, which can lead to cost-cutting measures such as layoffs and reduced investment, further weakening the economy.
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Higher Unemployment – Declining revenues force companies to cut jobs, increasing unemployment and reducing consumer spending, creating a vicious cycle of economic contraction.
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Monetary Policy Challenges – Central banks typically use interest rate cuts to stimulate growth, but if rates are already low, they have limited tools to combat deflation effectively.
Overall, deflation can lead to a downward economic spiral, reducing growth, discouraging investment, and increasing financial instability.