China’s consumer inflation scales near 3-year high but deflation battle far from over

BEIJING – China’s annual consumer price inflation accelerated to a 34-month high in December, but the full-year rate slumped to its lowest in 16 years while producer deflation persisted, backing market expectations for more stimulus to shore up soft demand.

Imbalances in China’s economy have worsened

over the past year even as growth is on course to meet Beijing’s target of “around 5 per cent” for 2025, buoyed by policy support and resilient goods exports.

US President Donald Trump’s global trade war has added to persistently soft consumer demand, which has remained a drag on confidence and growth for years amid a prolonged property crisis and a weak job market.

The December consumer price index (CPI) rose 0.8 per cent from the same month in 2024, National Bureau of Statistics (NBS) data showed on Jan 9, matching expectations in a Reuters poll and perking up from a 0.7 per cent increase in November.

The rise was mainly driven by food prices, especially those of fresh vegetables and beef, NBS statistician Dong Lijuan said. Pre-New Year holiday shopping and supportive policies also helped boost consumer prices, she added.

Chinese policymakers have repeatedly pledged to support a rebound in prices with monetary policy and cracked down on excessive competition. They have vowed to boost people’s income to unleash consumption potential and better align the country’s supply and demand.

Yet, the underlying demand impulse in the economy remains weak.

“Despite expectations of a recovery, inflation remains relatively low and should not preclude further monetary easing in 2026,” said Mr Lynn Song, ING’s chief economist for Greater China.

China economist at Capital Economics Huang Zichun said the elevated headline CPI was not owing to the government campaign to curb so-called “involution”, adding that overcapacity and deflationary pressures will persist in the coming years in the absence of stronger demand-side measures.

Indeed, for the entire 2025, consumer price growth was flat, well below the “around 2 per cent” goal policymakers were aiming for, a sign that stimulus measures, such as a consumer goods trade-in scheme, have yielded only modest results in lifting sentiment and containing deflationary pressure.

NBS data showed core inflation, which excludes volatile prices of food and fuel, rose 1.2 per cent year on year in December, unchanged from November.

Goldman Sachs economists estimate that the core price gauge excluding gold prices edged down in December from the prior month.

Annual growth in China’s consumer prices has for years failed to meet policymakers’ targets as the economy struggled to recover from the pandemic.

The producer price index (PPI) fell 1.9 per cent year on year in December, remaining in a deflationary funk for more than three years even as it eased from a 2.2 per cent drop in November.

Ms Dong attributed the moderation in factory-gate deflation to both global commodity prices – including rising prices of non-ferrous metals – and policies for controlling capacity in key industries.

Ms Huang, however, said there has not been “any fundamental improvement in overcapacity”.

“Prices of consumer durables continued to fall at a faster pace than during the depths of the global financial crisis, highlighting that the issue of excess supply remains unresolved in much of the manufacturing sector,” she noted.

For the whole of 2025, producer prices fell 2.6 per cent.

Given the slowdown in economic momentum in the second half of 2025, the market is watching for signs of additional government support measures in 2026.

The central government has allocated 62.5 billion yuan (S$11.5 billion) from special treasury bond proceeds to local governments to keep funding the consumer goods trade-in scheme in 2026.

The government has pledged to use monetary policy tools flexibly, such as by cutting interest rates and banks’ reserve requirement ratio, to keep liquidity ample and spur growth. REUTERS