China Grapples with Rare Deflation as Prices Drop, Weighing on Incomes and Growth

China is the only major economy dealing with deflation, with consumer prices dropping 0.8% year-over-year in January 2023.

Deflation is weighing on household incomes, corporate earnings, and government taxes in China.

Industrial overcapacity and the real estate recession are main causes of deflation according to economists.

Once deflationary expectations set in, consumers and investors may cut back spending further.

Falling asset prices and negative wealth effects from deflation are hurting investment and consumption in China.