China's Consumer Inflation Peaks, but the Battle Against Deflation Continues
China's consumer prices surged to a 34-month high in December, primarily driven by rising food costs, especially 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. Despite this, producer deflation showed a slight improvement, attributed to government efforts to curb overcapacity.
The $19 trillion Chinese economy faced challenges in 2025, with growth meeting Beijing's target of around 5% through policy support and resilient goods exports. Yet, the year's consumer inflation remained subdued, falling short of the 2% goal set by policymakers. This was evident in the flat consumer price growth throughout the year, with pork prices dropping 14.6% and gold jewelry prices soaring 68.5%.
Core inflation, excluding volatile food and fuel prices, rose 1.2% year-on-year, unchanged from November. The prolonged property market crisis and a weak job market have contributed to weak household demand, overcapacity, and price competition among producers. Despite the government's efforts to support price rebounds and boost income, the underlying demand impulse in the economy remains weak.
Economists predict that inflation may not preclude further monetary easing this year, as the headline CPI is not solely due to government campaigns against 'involution'. Zichun Huang from Capital Economics warns that overcapacity and deflationary pressures will persist without stronger demand-side measures. The market anticipates additional government support measures in 2026, as top leaders commit to a more proactive macroeconomic policy framework.
The central government has allocated 62.5 billion yuan to local governments for the consumer goods trade-in scheme, and pledged to use monetary policy tools flexibly to maintain liquidity and stimulate growth. Despite these efforts, the battle against deflation continues, and the economy's momentum in the second half of 2025 may require further proactive measures to ensure a balanced and sustainable recovery.
