China’s consumer inflation accelerated to its fastest pace in nearly three years at the end of 2025, offering policymakers a rare moment of relief after a prolonged struggle with weak prices. Yet beneath the headline rise, the broader picture remains one of stubborn deflationary forces, fragile household demand and structural imbalances that monetary easing alone may struggle to resolve. The latest data underscore how China’s inflation story is being shaped less by a durable recovery in consumption and more by temporary factors, leaving the battle against deflation far from over.

A headline rise driven by narrow and seasonal forces

December’s pickup in consumer inflation marked a notable shift after months of subdued readings. Prices rose at the fastest annual pace since early 2023, largely reflecting a surge in food costs rather than a broad-based improvement in demand. Seasonal factors linked to year-end consumption and preparations for the Lunar New Year played a significant role, lifting prices of fresh vegetables, meat and select staples.

Food inflation has historically been volatile in China, and its outsized contribution to the latest CPI increase highlights the uneven nature of price pressures. Pork prices, long a swing factor in Chinese inflation, remained deeply negative, offsetting gains elsewhere. Meanwhile, sharply higher prices for items such as gold jewellery inflated the headline figure but did little to reflect everyday consumer demand.

Stripped of these volatile components, underlying inflation remained modest. Core prices showed little momentum, reinforcing the view that the economy has yet to generate the kind of sustained demand needed to lift prices across a wider range of goods and services.

Why annual inflation still tells a deflationary story

While December’s data drew attention, the full-year picture was far less encouraging. Consumer price growth for the year was effectively flat, marking the weakest outcome in more than a decade and underscoring how difficult it has been for policymakers to reflate the economy. This gap between monthly upticks and annual stagnation reflects a pattern that has defined China’s post-pandemic recovery: short-lived improvements followed by renewed softness.

Household spending has remained cautious, constrained by weak income growth, job insecurity and the lingering effects of the property downturn. Even as headline GDP growth approached official targets, consumers continued to prioritise saving over spending, limiting upward pressure on prices.

Government initiatives aimed at stimulating consumption, including subsidies and trade-in schemes for household goods, have provided some support but have not fundamentally altered behaviour. As a result, inflation remains well below policymakers’ stated comfort zone, signalling that the economy is still operating with significant slack.

Producer deflation highlights excess supply

The persistence of producer price deflation offers a stark counterpoint to the modest rise in consumer prices. Factory-gate prices have now been falling for more than three years, reflecting chronic overcapacity in key manufacturing sectors and intense price competition among producers.

Although the pace of decline eased slightly in December, analysts caution that this moderation owes more to stabilising global commodity prices than to any structural improvement. Rising costs for certain inputs, such as non-ferrous metals, have lifted producer prices at the margin, but downstream competition continues to suppress pricing power.

The disconnect between consumer and producer prices highlights a deeper imbalance. While households face selective price increases, manufacturers remain trapped in a cycle of excess supply and falling margins, reinforcing deflationary pressure throughout the supply chain.

Overcapacity and the limits of supply-side fixes

China’s struggle with deflation is closely tied to overcapacity, particularly in manufacturing sectors that expanded aggressively in the years before and after the pandemic. Investment-led growth, once a cornerstone of economic expansion, has left industries producing more than domestic and global markets can absorb.

Authorities have acknowledged the problem and taken steps to curb excessive competition and guide capacity reductions in selected industries. However, progress has been uneven. Without a stronger rebound in demand, supply-side measures alone risk shifting excess production rather than eliminating it.

The continued decline in prices for consumer durables illustrates this challenge. Despite policy efforts, manufacturers have resorted to aggressive discounting to clear inventories, keeping deflationary pressures alive and eroding profitability.

Property woes and confidence drag on consumption

At the heart of China’s weak inflation dynamics lies the prolonged property market crisis. Housing has long been central to household wealth and confidence, and its downturn has had far-reaching effects on spending behaviour. Falling home prices and stalled developments have weighed on sentiment, prompting consumers to cut back on discretionary purchases.

The property slump has also strained local government finances and dampened investment, reducing income growth and reinforcing a cautious outlook among households. Even as policymakers roll out targeted support for the sector, confidence has been slow to recover, limiting the spillover into consumption that would help lift prices.

External factors have further complicated China’s inflation trajectory. Trade tensions and shifts in global supply chains have created uncertainty for exporters, even as goods shipments have remained relatively resilient. While strong exports have supported overall growth, they have done little to address domestic demand weakness.

Moreover, global disinflationary trends and intense competition in international markets have constrained pricing power for Chinese producers abroad, feeding back into domestic deflationary pressures.

Policy response: stimulus with diminishing returns

China’s leadership has signalled a willingness to do more to stabilise prices and support growth, committing to a more proactive macroeconomic stance. Fiscal measures, including the allocation of special treasury bond proceeds to fund consumer trade-in programmes, aim to encourage spending and shore up confidence.

On the monetary side, policymakers have kept the door open to further easing through interest rate cuts and reductions in banks’ reserve requirements. Liquidity conditions remain accommodative, and credit growth has been guided toward priority sectors.

Yet the effectiveness of these tools is increasingly in question. Previous rounds of stimulus have boosted activity temporarily but failed to generate sustained inflation. With households and businesses cautious, lower borrowing costs alone may not translate into higher spending.

The challenge of rebalancing supply and demand

Ultimately, China’s inflation dilemma reflects a deeper challenge: rebalancing an economy long driven by investment and exports toward consumption-led growth. This transition requires not just stimulus, but structural reforms that raise household incomes, strengthen social safety nets and reduce precautionary saving.

Efforts to boost employment quality, improve wage growth and restore confidence in property and financial markets are critical to unlocking consumption potential. Without these changes, inflation is likely to remain subdued, punctuated by occasional spikes driven by seasonal or commodity-specific factors.

The December inflation uptick provides some breathing room for policymakers, but it does not mark a turning point. Producer deflation, weak core inflation and sluggish consumption all point to an economy still grappling with deflationary headwinds.

Markets are therefore watching closely for additional measures in 2026, particularly those aimed at the demand side of the economy. Whether through expanded fiscal transfers, deeper reforms or more aggressive monetary easing, the pressure is on Beijing to prevent low inflation from becoming entrenched.

For now, China’s inflation story remains one of contrast: a headline rise offering momentary relief, set against an underlying reality of soft demand and excess supply. Until those structural issues are addressed, the fight against deflation is likely to continue, even as occasional data points suggest progress.

(Adapted from StraitsTimes.com)

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