China's Consumer Inflation Reaches 3-Year Peak, But Deflation Battle Persists
China's consumer prices surged to a 34-month high in December, driven by soaring food costs, particularly fresh vegetables and beef. However, the full-year consumer price index (CPI) slumped to its lowest level in 16 years, indicating persistent weakness in domestic demand. Producer deflation, a long-standing issue, showed only a slight improvement, despite government efforts to curb overcapacity.
The $19 trillion Chinese economy, despite meeting its growth target of around 5% for 2025, has faced mounting imbalances. These imbalances have been exacerbated by global trade tensions sparked by U.S. President Donald Trump's policies, which have further dampened consumer demand. This prolonged soft demand has hindered economic confidence and growth, particularly in the property market.
The December CPI rose 0.8% year-on-year, matching expectations, and up from the previous month's 0.7% increase. Food prices, especially fresh vegetables and beef, saw significant spikes of 18.2% and 6.9%, respectively. Pre-New Year holiday shopping and supportive policies also contributed to the rise in consumer prices.
Chinese policymakers have committed to supporting price rebounds through monetary policy and addressing excessive competition. They aim to boost income and unleash consumption potential, aligning supply and demand. However, the underlying demand in the economy remains weak.
Economists predict that despite the current inflationary pressures, further monetary easing is likely this year to support economic recovery. Zichun Huang from Capital Economics warns that overcapacity and deflationary pressures will persist without stronger demand-side measures. The full-year PPI fell 2.6%, indicating ongoing deflationary challenges.
The market anticipates additional government support measures in 2026, as top leaders have pledged a more proactive macroeconomic policy framework. The central government has allocated funds to local governments to sustain consumer goods trade-in schemes, and it plans to use monetary policy tools flexibly to maintain liquidity and stimulate growth.
