China slips into deflation: What does it mean?

China on Wednesday reported it had entered deflation for the first time since 2021 -- the latest indicator pointing to a slowdown in the world's second-largest economy.

This comes a day after news that the country suffered its biggest fall in exports since the early days of the pandemic, while imports tanked again as domestic and global demand fall away.

The Consumer Price Index, the main gauge of inflation, fell 0.3 in July, the National Bureau of Statistics said, having flat-lined in June.

While it was marginally better than the 0.4 percent decline forecast in a survey by Bloomberg, it marked the first drop since the beginning of 2021 and will add to pressure on authorities to provide much-needed support to the economy.

What is Deflation?

Deflation refers to falling prices of goods and services and is caused by a number of factors, including waning consumption.

And while cheaper goods may appear beneficial for purchasing power, falling prices pose a threat to the broader economy as consumers tend to postpone purchases in the hopes of further reductions.

A lack of demand then forces companies to reduce production, freeze hiring or lay off workers, and agree to new discounts to sell off their stocks -- dampening profitability even as costs remain the same.

China experienced a short period of deflation at the end of 2020 and early 2021, due largely to a collapse in the price of pork, the most widely consumed meat in the country.

Prior to that, the last deflationary period was in 2009.

Many analysts fear a longer stretch of deflation this time around, as China's main growth engines stall and youth unemployment is at a record high of more than 20 percent.