Data have long clearly shown that China’s current sluggish consumption has become a crucial issue facing the country. One commonly recognized cause is that heavy household debt burdens have eroded purchasing power and affected consumption. However, another potential reason may sound surprising to some, and that is structural substitution inflation. This concept means that the current observable price is actually a form of “pseudo-deflation”, while the real problem is structural substitution inflation. This inflation means people need to pay more money than before to obtain the goods and services they could originally get.
From the widely accepted understanding that the current situation is deflationary to it actually being inflation naturally carries a significant impact.
Inflation comes in wide varieties. Common types like production, demand, and currency all lead to inflation, but the “structural substitution inflation” mentioned here is a relatively special kind. Inflation is calculated based on a commodity basket. To determine whether prices are high or low, one looks at the commodity basket, and many people usually assume this “commodity basket” remains unchanged. In structural substitution inflation, this commodity basket has changed, resulting in structural shifts. Consequently, this actually causes price increases, but they are masked by CPI statistical data, leading to the perception that China is currently in deflation. This is where “pseudo-deflation” originates.
To take an example, roughly two decades ago, before the era of smartphones, a flip phone did not cost much, relatively speaking, yet the only options today are practically smartphones, with prices more than double those of older phones. Likewise, previously eating a meal meant paying just a few yuan per dish; yet many restaurants in the country have now closed down, choices have greatly diminished, and at the remaining restaurants a single dish costs several times more than before. The dishes themselves have not fundamentally changed, but their prices are significantly higher, and consumers have almost no alternatives because only those few restaurants remain.
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It is clear that the prices of goods and services undergo substitution as technology and structures change. Driven by this substitution, prices continue to climb significantly. This, in a nutshell, is structural substitution inflation. Such inflation is especially prone to occur in an era of rapid technological iteration, during periods when urbanization substantially drives up costs, and when policies virtually force so-called “upgrades”. The present time is precisely such a period.
The so-called “pseudo-deflation” means that while CPI statistics show price levels are not high and even exhibit a downward trend, the price levels consumers actually face are quite high.
The reasons for this situation are, first, statistical imbalance. China’s cities are widely distributed. In many parts of the northeastern provinces, it is not uncommon for a restaurant meal to cost only 3 to 5 yuan. Outside of tier-one, tier-two, and tier-three cities, there are many such places. These cities experiencing “depression” in low-price regions pull down CPI inflation data. Of course, CPI is the result of a weighted average, but the “pulling-down” effect caused by weight differences still exists. Areas with low prices can indeed lower the national CPI average through statistical weighting, making the inflation experienced by residents in high-price regions much higher than the national data. In fact, national CPI, as an average indicator, cannot fully reflect regional differences, consumption structure differences, and group differences. This is why policymakers need to pay more attention to regional CPI, inflation by income group, and the cost of living index, rather than just looking at a single national CPI figure.
Second, the structural changes inside the commodity and service basket do not all happen overnight. Therefore, within the year-on-year or month-on-month comparison channels, continuity is interrupted, and the changes are actually relatively smoothed out, making them look not exactly obvious. Yet the price increases faced by actual demand are rigid and continuously rising. This means CPI data actually loses its meaning in an era of major structural changes and instability.
Third, technical factors have a genuinely massive impact. To cite an example, in the past, buying a piece of software might cost 500 yuan as a one-time payment. Today, on the surface, software might cost only 300 yuan, yet the same software must be upgraded every year for another 200 yuan, making the price during the usage period significantly higher than previous spending. New energy vehicles and the like fall into this same category. The nature of property tax is identical; when actual expenditures are broken down, the total price shows an increase. There are also medical supplies and drugs; technology-driven price increases are widespread, and prices have clearly gone up in reality.
Fourth, substitutable goods are diminishing. In the past, the diversity of goods and services could enhance substitution. If the price was high, consumers would simply skip it. Now, due to policies, technology, and other factors, an increasing number of products and services are practically irreplaceable. Payment tools are a case in point, leaving people with no other choice and making it impossible to select a lower-priced option even if they wanted to.
Fifth, the booming and overly rapid development of the digital economy is making the reflection of prices even more covert, causing CPI data to fail.
Therefore, taken as a whole, structural substitution inflation may very well manifest in statistical figures as low inflation, or even close to “zero inflation” or deflation. This is precisely a major challenge that traditional price statistics face in an era of rapidly changing economic structures.
As it stands, structural substitution inflation represents a form of inflation that traditional CPI may underestimate. It does not manifest as a general rise in the prices of identical goods, but rather as the disappearance of low-cost choices, the takeover of new technology systems, and consumers being forced into higher-cost structures. Statistical data may present low inflation, but actual living costs may show obvious price pressure. This issue actually touches upon a larger theme: Is the industrial-era CPI model applicable to the digital economy and the era of rapid technological iteration?
Under such inflationary conditions, economic policies need to be exceptionally prudent. The mapping relationship between indicators and reality is not linear as traditional economic theory suggests. Changes in institutional space and costs will inevitably translate into prices, which are then borne by consumers. Consequently, economic policies that rely strictly on traditional price indicators may overlook how rising costs affect purchasing power.
