How long will CPI deflation last if excess savings are not converted to consumption?
Our research article in relation to consumer prices in China discusses the potential issue of China's excess savings not translating into consumption, which could lead to sustained CPI deflation. In July, the year-on-year CPI growth rate was -0.3%. The author had previously mentioned in an earlier article that deflation might occur in China, drawing from the experience of 2009 and suggesting that deflation could last for at least six months. However, in contrast to this perspective, many domestic scholars generally believe that deflation is unlikely in China due to the record-breaking increase in deposits among Chinese residents following the pandemic, similar to the "revenge consumption" observed in the United States.
The article highlights that during the US pandemic, government assistance led to a rapid surge in excess savings among households, followed by increased consumption, which contributed to economic recovery. However, Chinese residents continued engaging in "revenge savings" post-pandemic, which is one of the key factors leading to weakened CPI.
The article also delves into the issue of excess savings in Chinese households. Domestic scholars have differing definitions and calculation methods for excess savings, with some excluding housing and financial expenditures from the concept. In contrast, foreign scholars adopt calculation methods similar to those used in the United States, suggesting that China's households may have higher accumulated excess savings. Regardless of the quantity of excess savings, the conversion into consumption is expected to be a gradual process.
The article concludes by pointing out that due to weaker fundamentals faced by Chinese households, including increased debt, low income growth, high unemployment, and negative wealth effects, excess savings may persist. To expand domestic demand and prevent CPI deflation, assistance to low-income groups should be considered, rather than solely relying on excess savings to automatically transform into consumption.
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