China is teetering on the brink of deflation. That's a huge red flag for the global economy.

• China is teetering on the brink of deflation – where prices fall, rather than rise.
• Its central bank has cut interest rates in a scramble to prop up sputtering growth.

Nothing's going right for China's economy at the moment.

Since Beijing curtailed its harsh zero-COVID lockdowns at the end of last year, it's had to grapple with sputtering growth, the plunging yuan, and a sharp fall in industrial production.

Now, the country can add deflation to its growing list of economic worries.

Data released Monday showed that the cost of the average Chinese shopping basket stayed the same in June, while the Producer Price Index sharply fell.

If you're based in the West, "prices staying the same" might sound like a good thing. But most economists see deflation as a nightmare scenario.

That's because people are likely to hold off on buying things with the expectation that they'll become cheaper in the near future – and that drop in spending can then drag down growth.

Deflation "is a very bad sign macroeconomically," economist Richard Koo said in a recent episode of Bloomberg's "Odd Lots" podcast.

"Individually, [people trying to save money] might be doing the right things, but collectively, they may be killing the economy."

Famously, Japan has been trapped in a deflationary spiral for over 20 years, leading to several "Lost Decades" of economic stagnation.

China's central bank has shown how seriously it's taking the threat of both deflation and a slowdown in growth by cutting several key interest rates – essentially taking the opposite course of action to the US Federal Reserve.

But if those policies don't work, there could be pain ahead for the global economy.

China is the second-largest country by Gross Domestic Product, a massive exporter of goods, and a huge source of income for major US companies ranging from Apple to Nike – so any slowdown there is likely to be felt across the world.

Beijing's battle with falling prices is a reminder that when it comes to inflation, people have to be careful what they wish for.