Deflation is curbing China’s economic rise

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Deflation is curbing China’s economic rise
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Will China’s cheapness persist? That will depend not just on how fast it grows relative to America, but how fast its manufacturing grows relative to homebound industries

China’s consumer prices did not rise at all in the year to June. The country’sdeflator, a broad measure of the price of goods and services, fell by 1.4% in the second quarter, compared with a year earlier. That is the biggest decline since 2009.

Despite its difficulties, China’s economy is expected to grow by about 5% this year. America’s will probably grow by 2% at best. China would then appear to be gaining ground. But these forecasts exclude inflation and ignore exchange rates. America’s “nominal” growth, before adjusting for inflation, could exceed 6%, according to Goldman Sachs, a bank. The country will produce 2% more stuff, the price of which could rise by about 4%.

This trajectory is unexpected. Upstart economies like China’s are not only supposed to grow faster than mature economies, their prices are also supposed to “catch up” with the higher prices that prevail in rich countries. Emerging economies start out poor and cheap, then grow richer and more expensive—either because their prices rise quickly, or because their exchange rates strengthen.

China’s prices are now on average only 60% of American prices when comparing like-for-like items, according to the World Bank. Their figure lines up with this newspaper’s Big Mac index, which compares the price of burgers around the world. In China a Big Mac costs 24 yuan, the equivalent of $3.35. That is only 63% of the cost of a similar meaty treat in America.

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