China’s consumer price index (CPI) slipped into negative territory last month for the first time in more than two years, as sluggish domestic consumption weighed on an economic recovery.

The index, a key measure of inflation, fell 0.3 percent year-on-year in July, according to China’s National Bureau of Statistics.

After zero inflation a month earlier, analysts polled by the Bloomberg news agency had predicted an even more spectacular fall in the index (-0.4%).

Deflation is the opposite of inflation, in other words a decrease in the prices of goods and services. Although on paper the phenomenon looks like something favorable, since it theoretically increases purchasing power, it is characterized as a threat to every economy. As many consumers prefer not to spend, they postpone purchases in the hope that prices will fall further.

In the absence of demand, businesses are forced to reduce production, freeze hiring or lay off, and limit new orders only to replenish their stocks, which limits their profitability while costs remain unchanged.

Economists speak of a vicious circle in these cases.

China experienced a brief period of deflation in late 2020 and early 2021, mainly due to the decline in the price of pork, the Asian giant’s most consumed meat.

The previous one dates back to 2009.

Many analysts fear the current one will be longer, as China’s main engines of growth appear to be faltering and youth unemployment (a measure that only covers urban residents) breaks one record after another. , now exceeds 20%.

The crisis in the property sector, which long accounted for a quarter of GDP in China, is the “main” reason for the “deflationary shock”, according to economist Andrew Batson of Gavekal Dragonomics.

Exports, another key driver of growth for China, are also in decline.

In July, they recorded their biggest decline in a year (–14.2%), due to falling demand abroad, according to official data released yesterday Tuesday.

The emerging situation has a direct impact on tens of thousands of businesses, which are now idle.

Reasonably, the producer price index also shrank in July (–4.4%), for the tenth consecutive month, according to China’s statistics agency.

This index had registered a decrease of 5.4% in July.

Being in the red is synonymous with shrinking business margins.