You Can Easily Get Low Inflation If You *Really* Want To

From Natixis today, “China’s muted inflationary pressure at home contrasts with booming export prices feeding global inflation”:

An obvious reason to explain China’s low inflation rate is the weaker demand which is taking the hit from the Omicron outbreak. As China keeps on with the dynamic zero-Covid strategy, the plummeting mobility is weighing on household’s demand for goods and services and containing investment. Consequently, China’s core consumer price (CPI) inflation was lowered from 1.2% YoY in January to 0.9% YoY in April (Chart 1) although headline CPI inflation did go up from 0.9% YoY in February to 2.1% in April, mainly due to a sharp increase in food prices, which shot up from negative territory (-3.9%) in February to 1.9% in April. All in all, as long as domestic demand remains sluggish, it is hard for core CPI to rise too much for the remaining of the year.

So, when you look at this picture of relative core CPI performance (from this post):

Figure 1: Core CPI, n.s.a., in logs 2021M03=0. US series is BLS, s.a.. China series, s.a., from Ha et al. French series excludes tobacco and alcohol. Australia series interpolated from quarterly data by author. NBER defined recession dates peak-to-trough shaded gray. Source: BLS, OECD via FRED, Ha, Kose, Ohnsorge/World Bank, NBER, and author’s calculations.

Remember, all you need to do is push your economy into negative (or near negative) growth. For growth prospects, see this graphical depiction of the outlook for Chinese GDP (from this post).

Figure 2: Chinese real GDP, 2019Q1=1 (black), Goldman Sachs previous forecast (blue), Goldman Sachs May 18 forecast (red), IMF April World Economic Outlook forecast (sky blue square), Deutsche Bank May 17 forecast (light green), Bloomberg Economics May 20 (pink triangle). Source: NBS, IMF, Goldman Sachs, Deutsche Bank, Bloomberg Economics, and author’s calculations.