As global economic growth slows, many central banks around the world have begun to cut interest rates in an effort to reignite economic expansion. One of the main reasons driving this move is that the year-on-year inflation rate in most countries has gradually declined from its post-pandemic peak to their targeted “2%” level.

In theory, moderating price growth should bolster consumer optimism, as it suggests that inflation’s erosion of wage gains is easing. Yet why do media reports still frequently highlight consumers struggling under the weight of high living costs?

The answer lies in the fact that the inflation rate measures year-over-year price changes. While current price growth may have slowed compared to the previous year, it does not change the fact that prices have significantly risen from the pre-pandemic levels.

(Source: BLS, EuroStat, Statistic Bureau of Japan, TrendForce)

Take the United States as an example. The latest CPI and core CPI year-on-year growth rates were 2.4% and 3.3%, respectively, marking their slowest pace in nearly three years. Meanwhile, the Federal Reserve’s preferred inflation gauge, core PCE, stood at 2.7%, down significantly from its peak of 5.6% in February 2022, reflecting a 2.9 percentage point decline.

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However, consumer perceptions often remain anchored to periods of lower prices, making it difficult to truly appreciate the recent moderation in price growth. From the perspective of consumers, prices for goods are still higher than they were a few years ago, even if the pace of increase has slowed.

According to average price data from the U.S. Bureau of Labor Statistics, most goods have seen price increases of around 20-40% over the past few years. Importantly, these elevated prices are unlikely to revert unless deflation occurs—something the Federal Reserve is unlikely to allow.

(Source: BLS)

Additionally, while wage growth has outpaced inflation since mid-2023, overall wage increases since the pandemic have remained below the cumulative rise in inflation. This has been a key factor in the decline in consumer confidence and the frustration with persistently high inflation in recent years.

(Source: BLS, Fred, TrendForce)

China has yet to shake off the short-term risk of deflation, according to data released by the National Bureau of Statistics on November 9.

China’s Consumer Price Index (CPI) rose by 0.3% year-on-year in October , marking a 0.1 percentage point decline from the previous month. On a month-on-month basis, CPI decreased by 0.3%, reflecting a similar 0.3 percentage point drop.

Breaking down the components, food prices—a key driver of CPI growth—slowed to a 2.9% year-on-year increase, representing a 0.4 percentage point deceleration. Non-food prices, however, recorded a deeper year-on-year decline of 0.3%, mainly due to falling international crude oil prices. Service-related prices edged up by 0.2 percentage points to a 0.4% annual growth rate, driven by a temporary boost in travel costs during the National Day holiday, but still registered a 0.4% year-on-year decline. Excluding food and energy, core CPI rose by just 0.2%, a modest increase of 0.1 percentage points from the previous period.

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On the Producer Price Index (PPI) side, China’s PPI contracted by 2.9% year-on-year in October, with a marginal decline of 0.1 percentage points from the previous month. The month-on-month figure showed a decline of 0.1%, albeit an improvement of 0.5 percentage points.

The breakdown indicates that producer prices for means of production remained down 3.3% year-on-year, though month-on-month growth of 0.1% suggests short-term support from recent stimulus measures targeting construction-related industries. Conversely, prices for consumer goods saw a broader decline, with a year-on-year decrease widening by 0.3 percentage points to 1.6%. Among durable goods, the decline in automobile factory prices expanded to 3.1%, while prices for computers, communications, and electronic products contracted by 2.9%.

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Overall, the impact of China’s September monetary easing policies appears limited, as consumer confidence remains weak and spending sluggish. This continued weakness has forced businesses to further lower prices, compressing margins and sustaining deflationary pressures in the economy.

The Chinese Government Passes a 10 Trillion Yuan Fiscal Policy

A day before the data release, China’s National People’s Congress Standing Committee approved a fiscal package totaling approximately 10 trillion yuan. This package aims to raise the annual ceiling for special local government bonds by 2 trillion yuan over the next three years to replace implicit local government debts. Additionally, 800 billion yuan per year over the next five years will be allocated to addressing these hidden debts through special bond issuance.

However, these measures primarily address debts accumulated through Local Government Financing Vehicles (LGFVs), which local governments have used to fund infrastructure projects and meet central GDP growth targets. By not appearing on local government balance sheets, these debts have enabled governments to bypass borrowing limits, leading to a massive buildup of hidden liabilities.

Banks often repackage LGFV bonds as high-yield wealth management products sold to domestic savers. Even though these savers know the low or non-existent economic returns of many of these projects, they continue to invest, confident that the central government will ultimately guarantee repayment. This has led to broad participation in what could be described as a “Ponzi scheme” with little regard for moral hazard.

The results are evident: the persistent decline in China’s real estate market appears to be leading the country toward a balance sheet recession, with private consumption and investment weighed down by high private sector debt repayment pressures. Although the government is aware of the issue, its approach has been largely confined to “new debt to replace old debt,” preventing meaningful economic recovery and efficient capital allocation.

With the end of the U.S. presidential election last week, diminishing uncertainty boosted equity markets, leading to a strong 4.66% rally in the S&P 500 Index, reaching 5,995.5 points.

In the bond market, the victory of Donald Trump and robust economic data drove the 10-year U.S. Treasury yield to approximately 4.5%, before retreating to around 4.3% following a shift in the Federal Reserve’s stance. Meanwhile, the U.S. dollar index edged closer to the 105 threshold.

Key Economic Data Review for Last Week:

U.S. Presidential Election: Presidential candidate Donald Trump secured seven pivotal swing states, claiming victory with 312 electoral votes over Harris and becoming the 47th President of the United States. The Senate has been confirmed as controlled by the Republican Party, and the House currently shows a Republican lead of 213 seats versus the Democrats’ 203 seats. Should the Republicans maintain their lead, the U.S. will enter a period of unified Republican governance under Trump’s administration.

China’s National People’s Congress Standing Committee: The committee announced an increase in local government special bond issuance limits by RMB 6 trillion (approximately USD 837 billion) to restructure hidden local debts. Additionally, over the next five years, beginning in 2024, RMB 800 billion per year from new local special bond allocations will be earmarked for debt reduction, with an anticipated total restructuring of RMB 4 trillion in hidden debt.

U.S. Monetary Policy Decision: The Fed cut rates by 25 basis points at its November meeting, shifting its policy stance from the markedly dovish position of September to a more neutral outlook. This change reflects stronger-than-expected resilience in recent U.S. economic data. Following the meeting, market expectations for rate cuts next year were adjusted, with the Fed now anticipated to cut rates 25 basis points in December 2024, and 75 basis points in the first half of 2025, before pausing further reductions (previously expected to cut four times in 2025).

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Key Economic Data for This Week:

U.S. CPI (11/13): The impact of October’s hurricanes may have pushed many to seek temporary accommodation, driving up service prices. Additionally, hurricane damage to automobiles may lead to further increases in auto parts prices. According to forecasts from the Cleveland Fed, October’s CPI annual growth rate is expected to rise to 2.56% (from 2.41% in September), with core CPI projected to inch up to 3.34% (from 3.26%).

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U.S. Retail Sales (11/15): Entering the traditional holiday shopping season, the National Retail Federation anticipates that strong household financial health will continue to support consumer spending. Market expectations for retail sales growth remain robust, with a monthly increase projected at 0.3% (previously 0.4%) and an annual growth rate of 2.2% (previously 1.74%).

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China’s Monthly Economic Data (11/15): Against the backdrop of government initiatives such as old-for-new consumer goods campaigns and Singles’ Day promotions, the market anticipates that October’s retail sales growth will increase to 3.8% year-on-year (from 3.2%). With Trump’s election as President and the possibility of significant tariffs on Chinese imports, Chinese firms may accelerate production and exports, with industrial output growth expected to rise to 5.5% (from 5.4%). Meanwhile, fixed asset investment remains constrained by weaknesses in the real estate sector and local government finances, with projected cumulative annual growth holding steady at 3.5% (from 3.4%).

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UK CPI fell within the target range in September, according to data released by the UK Office for National Statistics on October 16. The CPI increased by 1.7% year-over-year in September, down from 2.2% in the previous month and below the market expectation of 1.9%, marking the lowest level since April 2021.

Core CPI, which excludes energy, food, and tobacco, rose by 3.2% year-over-year, a decrease of 0.4 percentage points from the previous month.

The main factor behind the CPI decline was the transportation sector, where prices dropped by 2.2% year-over-year, a 3.5 percentage point reduction from the previous month, contributing -0.3 percentage points to overall CPI growth. This was primarily due to lower airfares and a decline in crude oil prices.

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Moreover, The Bank of England’s closely watched services prices rose by 4.9% year-over-year, down 0.7 percentage points from the previous month, reflecting the continued easing of wage pressures. The latest data shows that regular pay growth in August was 4.9% year-over-year, a decline of 0.2 percentage points from the previous period, marking the lowest level since June 2022.

Earlier, in its August Monetary Policy Report, the Bank of England predicted that as wage pressures ease, services inflation would gradually decline to around 5.3% in 2024.

According to Reuters report, the latest CPI data has further fueled market expectations for a rate cut by the Bank of England. The probability of a two-rate cut by the end of the year has risen from 80% to 90%, and the British pound fell by approximately 0.8 cents against the U.S. dollar on October 16.

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China’s CPI showed a slowdown in September, according to data released by China’s National Bureau of Statistics on October 13. The Consumer Price Index (CPI) rose 0.4% year-over-year, below both the previous month and the market expectation of 0.6%.

Breaking down the details, food prices increased by 3.3% year-over-year, up 0.5 percentage points from the previous month, contributing 0.66 percentage points to the overall CPI growth. However, non-food prices shifted from a 0.2% year-over-year increase to a 0.2% decline. Energy prices dropped by 3.5% (previously -2.0%), while service prices rose by 0.2% (previously 0.5%), reflecting lower energy prices due to base effects and reduced demand for accommodation services following the summer season.

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Overall, domestic demand in China remains weak. Excluding food and energy, core CPI grew by only 0.1% year-over-year, down 0.2 percentage points from the previous month. Additionally, the Producer Price Index (PPI) fell by 2.8% year-over-year in September, a wider decline than the previous month’s 1 percentage point drop, indicating rising deflationary pressures.

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On the same day, China’s General Administration of Customs released September trade data. Exports grew 2.4% year-over-year, down from 8.7% in the previous month and below market expectations of 6%. Imports rose by 0.3%, lower than both the previous month’s 0.5% growth and the market forecast of 0.9%, continuing to reflect weak domestic demand and increased trade barriers from other countries.

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While China announced large-scale monetary easing policies in mid-September, specific implementation plans for accompanying fiscal measures have yet to be unveiled. Given the persistent weakness in demand and challenges to future export growth, China faces significant difficulty in achieving its 5% GDP growth target for the year.