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

While on paper falling prices may seem like a good thing for purchasing power, a drop into deflation poses a long-term threat.

Instead of spending, consumers postpone purchases in the hope of prices going even lower.

Faced with falling consumer demand, companies cut back on production, freeze hiring or lay off staff and agree to further price cuts to clear their inventories. This weighs on profitability as their costs remain the same.

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