Many people in China feel like that prices of daily groceries, like fresh fruit and vegetables, are going up, creating an illusion that inflation is looming large. However, the latest economic data are jaw-dropping.

China's CPI slipped 0.3% MoM in March, and rose just 0.7% YoY. PPI was flat MoM in March, and dropped 2.5% YoY. Car prices are going down, so are electronics prices amid lackluster demand.

These are early signs of deflation, rather than inflation. And the former is even scarier than the latter. Why are these two totally opposite phenomenon occur simultaneously? Here is why.

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People tend to hold back from purchasing when they anticipate lower prices going forward. Therefore, deflation is usually seen as the start of economic recession. The most typical examples are Japan and Europe, whose economies have barely grown for years, and the reason for the most part is failure to solve deflation problem.

In recent days, there has been hot discussion on whether China is heading deflation.

Official data shows that China’s M2 keeps hitting new highs, while the growth rate of CPI has been in a downward path. Moreover, credit expanded in March, with new deposits by residents adding 205.1 billion yuan YoY to 2.9 trillion yuan. This means that banks have released liquidity into the market, but residents have refrained from purchasing and kept their money in banks instead.

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After being hit by the pandemic for three years, confidence in investment and consumption has been severely diminished.

However, with the recovery of Chinese economy partly driven by service and tourism industries, as well as rebound in pork prices, deflation in strict sense is unlikely to persist for long.

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