Inflation worries in US, deflation tension in China: Two tales of two biggest economies

The US and Chinese economies exemplify diverging models of growth. They are quite different from each other.

Now, Inflation and deflation tell contrasting tales in the world’s two largest economies, as China grapples with weak domestic demand and the US contends with signs of persistent inflationary pressures.

China’s deflation problem

China’s consumer price inflation (CPI) slowed to a near standstill in December, registering just 0.1 per cent year-on-year, according to data released Thursday by the National Bureau of Statistics. On a month-to-month basis, CPI remained flat, following a 0.6 per cent decline in November.

Food prices, a key component of China’s CPI basket, declined 0.6 per cent from the previous month, with fresh vegetables falling 2.4 per cent and pork prices down 2.1 per cent.

These figures are a result of ongoing struggles with subdued domestic consumption in China.

Despite Beijing’s efforts to stimulate spending—such as interest rate cuts, support for the property and stock markets, and expanded bank lending—consumer demand remains tepid. On Wednesday, China introduced a consumer trade-in scheme offering subsidies for equipment upgrades, aiming to boost consumption. However, analysts question its broader impact.

These subsidies are a “kind of a quick fix” targeting specific products but do not do much for the broader consumption, said Louise Loo, lead economist at Oxford Economics.

Shaun Rein, managing director of the China Market Research Group, said “Deflation looms heavily over China’s economy in the run up to Chinese New Year as consumers look for deals when buying gifts for family members.”

A totally different problem for US

In contrast, the US economy is showing resilience, with inflationary pressures persisting. The Labor Department reported an unexpected increase in job openings in November, while a separate survey revealed accelerating services sector activity in December. Input prices surged to their highest levels in nearly two years, fueling inflation concerns.

“Markets are starting to recognize that they thought we were in the eighth inning of the inflation fight but now it’s going to be higher for longer,” said Joe Mazzola, head of trading and derivatives strategist at Charles Schwab.

The robust data has also tempered expectations for Federal Reserve interest rate cuts. Traders now anticipate the Fed holding rates steady until June, with only modest reductions expected through the rest of 2025, according to the CME Group’s FedWatch tool.

A mix of solid growth and a new wave of inflationary pressure from tariffs means the Fed will likely switch from cutting interest rates at every decision … to pausing in between rate cuts in 2025,” Bill Adams, chief economist for Comerica Bank, said in a note.

With inputs from agencies