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Inflation Picks Up Ahead of Year-End Spending

China’s consumer inflation accelerated in December, reaching its strongest level in nearly three years as household spending improved ahead of the Lunar New Year holiday. Data from the National Bureau of Statistics showed consumer prices rising 0.8 percent year on year, up from 0.7 percent in November and marking the highest reading since February 2023.

On a month-on-month basis, prices increased by 0.2 percent, double market expectations of a 0.1 percent rise. The pickup suggests some seasonal improvement in consumption, although broader demand remains subdued.

Core inflation, which strips out volatile food and energy prices and is closely watched as a measure of underlying demand, rose 1.2 percent from a year earlier. This reading was unchanged from November, indicating that domestic consumption momentum remains fragile despite the headline improvement.

Food Prices Drive the Headline Increase

The rise in consumer inflation was driven largely by food prices, particularly fresh vegetables. Vegetable prices surged 18.2 percent year on year, reflecting supply disruptions caused by severe winter weather in key producing regions.

In contrast, pork prices, a major component of China’s consumer basket, fell 14.6 percent compared with the same period last year, continuing a trend of weak pricing due to ample supply and cautious consumer demand.

Non-food items showed mixed performance. Prices for durable consumer goods declined 3.5 percent year on year, underscoring ongoing pressure from weak discretionary spending and intense competition among manufacturers.

Full-Year Inflation Misses Beijing’s Target

Despite December’s acceleration, China’s consumer inflation remained flat for the full year, falling well short of the government’s official target of around 2 percent. The miss highlights the limited impact of stimulus measures introduced so far, including consumer goods trade-in programs and selective fiscal support.

Economists note that while short-term spending improved toward year-end, households remain cautious amid income uncertainty, soft wage growth, and lingering concerns over the property market.

Producer Price Deflation Extends Beyond Three Years

On the industrial side, deflationary pressures remain deeply entrenched. Producer prices declined 1.9 percent in December from a year earlier, slightly better than market expectations for a 2 percent drop and an improvement from November’s 2.2 percent decline.

The moderation was partly supported by firmer prices for non-ferrous metal materials. However, producer prices have now been falling for more than three consecutive years, reflecting chronic overcapacity and weak pricing power across many sectors.

Gold jewelry stood out as a notable exception. According to the NBS, prices surged 68.5 percent year on year in December, driven by strong global demand for safe-haven assets amid heightened recession fears and financial market volatility.

Growth Holds Up, But Demand Remains Uneven

China is expected to meet its annual economic growth target of around 5 percent, but momentum appears to be slowing. Economists at Bank of America Global Research estimate real GDP growth eased to approximately 4.5 percent in the fourth quarter, down from 4.8 percent in the previous quarter.

Fixed-asset investment weakness continued to weigh on the economy. Investment is estimated to have contracted by roughly 11.8 percent year on year in December, compared with an 11.1 percent decline in November, reflecting ongoing stress in property and infrastructure investment.

Industrial production, however, showed signs of stabilization. Growth is estimated at around 4.9 percent, supported by improved manufacturing activity and the typical year-end acceleration in output.

Manufacturing Shows Tentative Signs of Recovery

Manufacturing activity unexpectedly returned to expansion in December, snapping an eight-month contraction streak. The official purchasing managers’ index rose to 50.1 from 49.2 in November, moving back above the 50 threshold that separates growth from contraction.

While the improvement offers some encouragement, analysts caution that the rebound may prove fragile without a sustained recovery in domestic and external demand.

Property Sector Remains a Major Drag

China’s prolonged property downturn continues to weigh heavily on confidence and spending. A recent article in the Communist Party’s flagship Qiushi Journal called for a stronger and more comprehensive package of measures to stabilize the real estate sector, rather than incremental or piecemeal interventions.

Economists expect further policy easing, including potential mortgage rate cuts and relaxed home purchase restrictions. However, these steps may fall short of reversing the downturn. Estimates suggest new home sales by floor space could decline around 8 percent in 2025, followed by a further 7 percent drop in 2026.

Corporate Profits Under Pressure

Deflation and price competition continue to erode corporate profitability. Industrial firms reported a 13.1 percent year-on-year drop in profits in November, the steepest decline in more than a year.

Price wars remain particularly intense in the automotive sector. Carmakers have launched fresh rounds of discounts and incentives as demand stays weak and some tax benefits for electric vehicles are scaled back. Factory-gate prices in the auto industry fell 2.8 percent over the year, with gasoline-powered and new energy vehicle prices down 2.4 percent and 2.2 percent respectively in December.

Outlook Remains Cautious

Looking ahead, economists expect inflation to remain subdued. Forecasts point to flat consumer inflation in 2025, while producer prices are projected to fall around 2.7 percent, potentially marking the longest deflationary streak on record.

While policymakers have reiterated commitments to boost consumption and stabilize the property market, investors and businesses remain cautious. Without more forceful and coordinated stimulus, China’s economy is likely to continue grappling with weak demand, persistent deflationary pressure, and uneven growth across sectors.