After more than two years of deflation, China’s economy slipped into deflation in July.

Last month, the official consumer price index fell by 0.3% from a year earlier.

This puts pressure on the government to revive demand in the world’s second largest economy, analysts said.

As a result of weak import and export data, questions have been raised about the pace of China’s recovery since the pandemic.

In addition, the country is facing ballooning local government debt and housing market challenges. As a record number of university graduates enter the Chinese job market this year, youth unemployment, which is at a record high, will also be closely watched.

As prices fall, China has a harder time lowering its debt – and all the challenges that come with it, such as slower growth.

A secret sauce cannot be applied to lift inflation, according to Daniel Murray from EFG Asset Management. According to him, monetary policy should be eased along with more government spending and lower taxes.

The end of pandemic restrictions led to a boom in consumer spending in most developed countries. The economy struggled to keep up with the demand, as people with saved money suddenly found themselves able and willing to spend.

As a result of the Russian invasion of Ukraine, prices soared due to the huge increase in demand for limited-supply goods.

As the economy emerged from the world’s tightest Coronavirus regulations, prices in China did not soar. The last time consumer prices fell was in February 2021.

In fact, they have been facing deflation for months, flatlining earlier this year as a result of weak demand. Likewise, factory gate prices – the prices manufacturers charge – have declined.

As an adjunct professor at the Hong Kong University of Science and Technology, Alicia Garcia-Herrero said, “It is worrisome as it shows that Chinese demand is low while the rest of the world is awakening, particularly the West.”

Deflation will not help China. The debt burden will increase, all of which are not good news, she said.