China – Center of global deflation

In spite of Aggressive monetary easing by major central banks around the world, since 2008/09 financial crisis, inflation is yet to reach sustainable level. Some economies like countries in Euro zone, Japan still struggling to beat deflationary threat.

What might be fuelling global deflation?

Relentless rout in Commodity prices adding downside pressure to global inflation. Bloomberg commodity index has reached 13 year low and commodity sell off is quite broad based, covering all sectors - energy, Agricultural, industrial, precious

• Oil is trading near its lowest since financial crisis.
• Gold is trading close to its lowest level in five years.
• Sugar has fallen to seven year low.
• Milk prices have dropped 65% in last 12 months.
• Copper is reeling to its lowest, since financial crisis, down close to 28% in last 1 year.

And China is the culprit behind this major commodity rout.

Before the financial crisis, ships loaded with commodities were heading to China, as the giant was consuming more than half of global production in some.

• In 2012, China was consuming about more than 50% of global iron ore, Aluminum and Nickel. Copper and Zinc consumption was about 50% of global production.

This has led to some serious investments and capacity increase in commodity segment, which is leading to today's excess capacity.

China was able to maintain some growth prospects even after the crisis till 2011/13, after which its economy have started to crumble at sharp pace.

It now turns out that in 2015, Chinese economic activities have slowed to multi decade low and indicators are pointing to even lower.

Last Friday, preliminary reading for July in HSBC PMI came at 48.2, lowest in 15 months, suggesting further slowdown.

World's is likely to keep feeling the chill of deflationary threat as world's second largest economy slows down further.