China's Inflation Stagnation: Causes and Remedies for Persistent Deflation

China's consumer price index (CPI) growth has remained near zero, with September's 0.4% year-on-year increase barely above August's 0.2%. This persistent low inflation suggests deflationary pressures, which can hinder economic recovery. To understand the underlying causes and potential remedies, it is essential to analyze the structural issues and policy responses in China's economy.

**Causes of Persistent Low Inflation**
1. **Cautious Monetary Policy**: The Chinese government's cautious monetary policy, characterized by austerity in money printing, has contributed to the low CPI. While this approach helps maintain financial stability, it may also dampen consumer spending and investment. 2. **Production Recovery**: The recovery of production, particularly in consumer goods, following the containment of COVID-19, has also played a role in keeping prices in check. Increased supply can lead to lower prices, exacerbating deflationary pressures. 3. **Tail Rising Effect**: The "tail rising effect" has influenced the CPI, where high prices in the same period one year ago result in lower growth rates in the current year. This phenomenon can temporarily mask underlying inflationary pressures.

**Policy Responses and Alternatives**
The People's Bank of China (PBOC) has employed a mix of monetary policy tools to combat deflation, including lowering the reserve requirement ratio (RRR) and interest rates. However, these measures have had limited success, as seen in the continued low CPI growth.
To address deflationary pressures more effectively, policymakers should consider alternative policies focusing on boosting consumption and reducing living costs for households. This could involve offering tax breaks to companies that raise wages, especially for middle- and low-income workers, and lowering personal income taxes for these groups. These policies would directly stimulate consumption without placing a significant cost burden on businesses.
Another option is to decrease the demand for money by lowering essential living costs such as education, healthcare, and housing, particularly for middle- and low-income workers. This would ease the financial burden on households, allowing them to meet their basic needs without hoarding cash. However, this approach may face resistance from entrenched economic interests.

**Conclusion**
China's persistent low inflation and deflationary pressures require a multifaceted approach to address the underlying structural issues. While monetary policy has played a role in maintaining financial stability, alternative policies focusing on boosting consumption and reducing living costs for households could provide additional support for economic recovery. By implementing targeted fiscal policies and structural reforms, China can mitigate deflationary pressures and foster sustainable growth.