Inflation occurs because of currency depreciation. Because currencies depreciate, more money is needed to measure the value of the same amount of goods. So why did the renminbi depreciate, but prices did not rise?
Why did the renminbi depreciate and prices not rise?
In the statistics, one of the most important data used to measure the speed of price rise is the CPI, and the latest CPI growth rate in the mainland is only 0.1% year-on-year, and it fell to negative at the lowest, indicating that the price level in the mainland has basically not risen in the past year. The renminbi, on the other hand, has depreciated against major currencies such as the US dollar and the euro.
Does this mean that even if the renminbi depreciates, prices will not necessarily rise?
First of all, the depreciation of the renminbi is divided into internal depreciation and external depreciation. The manifestation of internal devaluation is a decline in purchasing power at home, while the manifestation of external depreciation is a decline in the exchange rate of foreign currencies.
If the renminbi depreciates internally, it will inevitably lead to an increase in prices. Because the internal depreciation of the renminbi and the rise in prices are manifestations of the same phenomenon. The internal depreciation of the renminbi is because prices rise, and the reason why prices rise is because the renminbi depreciates.
Of course, the price here refers to the overall price level of the whole society, not the price of a certain commodity or several commodities.
The depreciation of the renminbi to the outside world will not necessarily cause prices to rise. The depreciation of the renminbi can only mean that when buying foreign goods, the price will rise.
Because the currencies used by each country may not be the same, if you want to buy goods from these government bonds, you may have to settle in the country's currency or a more common international currency.
When people depreciate these currencies, more renminbi is needed to exchange the same amount of these currencies. This means that buying the same amount of goods, even if the price of the commodity does not change, it will cost more yuan, that is, the price of foreign goods has risen.
However, even if the price of buying foreign goods rises, it will not necessarily have much impact on the overall price level in China, and it will not necessarily cause prices to rise.
Second, even if the renminbi depreciates externally, it does not completely affect prices. Under the depreciation of the RMB, the overall domestic price level may not change, but some prices will still be affected.
A more typical example is oil prices. Since the mainland is a large oil importer, more than 70% of the oil comes from imports, when the renminbi depreciates abroad, it is more expensive to import oil from abroad, and further drive up domestic prices.
In the past period, although international oil prices have not risen much or even fallen, domestic oil prices have been raised many times, which is not unrelated to the depreciation of the RMB.
Because after the depreciation of the renminbi, more money is spent on imported oil, and these increased costs may be passed on to consumers, and consumers will bear the rising costs through price increases.
Therefore, the depreciation of the renminbi will also cause prices to rise. As for whether it will cause a collective rise in domestic prices, it depends on the weight of imported goods in all commodities. If the weight is relatively high, then the price increase of imported goods may also cause an overall increase in domestic prices.
In short, it is almost certain that the depreciation of the renminbi will cause prices to rise, depending on what price increases will result.