China's economy is facing a tricky balancing act as consumer inflation hits a 34-month high, yet the battle against deflation rages on. This economic tug-of-war is a complex issue, and it's crucial to understand the implications for both China and the global economy.
The Rising Cost of Living: A 34-Month High
China's annual consumer price inflation has accelerated, reaching a 34-month peak in December. This surge is primarily driven by rising food prices, particularly fresh vegetables and beef, which have seen significant increases. Pre-holiday shopping and supportive policies have also contributed to this inflationary trend.
However, the full-year consumer price index (CPI) tells a different story, slumping to its lowest level in 16 years. This indicates a persistent weakness in domestic demand, a concern for policymakers aiming for a 5% growth target in 2025.
But Here's Where It Gets Controversial...
Despite the high inflation figures, the underlying demand in the economy remains weak. Economist Lynn Song suggests that further monetary easing may be necessary this year, contrary to expectations of a recovery. Zichun Huang, China economist at Capital Economics, adds that the elevated CPI is not solely due to the government's campaign to curb overcapacity, but rather a result of persistent deflationary pressures and overcapacity issues.
The Year in Review: A Flat Consumer Price Growth
For the entire year of 2025, consumer price growth remained flat, falling short of the 2% goal set by policymakers. This indicates that stimulus measures, such as the consumer goods trade-in scheme, have had limited success in boosting sentiment and containing deflation.
Pork prices, a key indicator of food inflation, fell 14.6% year-on-year in December, while gold jewellery prices surged 68.5%. Core inflation, excluding food and fuel, remained unchanged at 1.2% year-on-year.
The Property Crisis and Job Market: A Drag on Demand
A prolonged property market crisis and a weak job market have contributed to lacklustre household demand. This, coupled with overcapacity and price competition among producers, has kept annual growth in consumer prices below policymakers' targets for years.
And This Is the Part Most People Miss...
The producer price index (PPI) has been in a deflationary state for over three years, despite a slight moderation in December. Economist Huang highlights that overcapacity remains a fundamental issue, with prices of consumer durables falling at a faster pace than during the global financial crisis.
For the whole year, PPI fell 2.6%, indicating a slowdown in economic momentum.
Looking Ahead: More Stimulus on the Horizon?
With the economic slowdown in the second half of 2025, the market is anticipating additional government support measures in 2026. The central government has already allocated funds for the continuation of the consumer goods trade-in scheme, and policymakers have pledged to use monetary policy tools flexibly to maintain liquidity and spur growth.
The question remains: Will these measures be enough to address the complex issues of inflation and deflation, and what impact will they have on the global economy?
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