The US still has an inflation problem — so does China, it’s just the exact opposite one
Since the pandemic, the world’s biggest economies have been wrestling with two very different problems.
Prices go up too fast? Boo. Prices go down? Also boo.
That’s the short version of the dueling narratives in the two most important economies on the planet, after the latest set of Chinese and the US inflation prints, out last week, revealed that the gaping inflation hole between the world’s two biggest economies is now at its widest since the end of March 2024.
Though the US breathed a sigh of relief as its inflation rate eased to a lower-than-expected 2.8% in February, consumer expectations for how much prices will rise in the coming 12 months have nearly doubled since November, as the American middle class expects to continue having to contest with price rises. In China, however, the opposite is true — the latest consumer inflation figures dropped far more than expected to -0.7%, leaving Chinese CPI below zero for the first time in 13 months.
Despite ongoing efforts on both ends of the inflation spectrum, the fire and ice situation between the two countries is expected to continue, particularly amid an escalating trade dispute whose impacts are yet to be fully reflected in the respective CPI data.
During the pandemic, Beijing had eyes on the supply side, encouraging production at the price of offering consumers appropriate stimuli, while the US mobilized major monetary easing to keep things moving. To oversimplify, since then, Chinese economists have been losing sleep over ways to open people’s wallets, while the worry in Washington has been about keeping a lid on demand.
The lesser of two evils
While prices falling sounds like a nice reprieve — particularly if you’re a US consumer who’s faced over three years of inflation — that’s arguably the worse of the two problems to be facing, at least if you’re an economist. Deflation incentivizes saving, as consumers and businesses withhold spending as they wait for prices to drop... which tends to lead to more price drops, more saving, and a vicious cycle of delayed consumption or investment.
Investors will be closely watching today’s Federal Reserve meeting for any hints of how the US will tackle still stubborn inflation. In China, it’s Hail Mary time, with the government revealing a 30-point stimulus plan on Sunday in a bid to keep the economy out of a prolonged deflationary spiral.
