Producer Prices Plunge Again, Marking Deepest Decline in Nearly Two Years

China’s Producer Price Index (PPI) tumbled 3.6% in June 2025 compared to the same month a year ago—its most severe decline since July 2023—according to fresh data from the National Bureau of Statistics (NBS). This marks the latest chapter in China’s deflationary trend, one that has persisted for nearly three years since September 2022.

The June figure fell even more than economists had anticipated. A Reuters poll had forecast a 3.2% drop, but the actual figure exceeded those expectations, highlighting the ongoing struggles of China’s industrial sector in the face of oversupply and an entrenched price war across key industries.

Consumer Prices Show Modest Growth, But Recovery Remains Fragile

While producer prices fell sharply, consumer prices offered a faint glimmer of recovery. The Consumer Price Index (CPI) inched up 0.1% year-on-year in June, breaking a four-month streak of year-over-year declines and narrowly beating expectations of a flat reading.

Stripping out volatile food and energy prices, core CPI rose by 0.7%, the highest annual increase in over a year. Still, the core inflation figure remains well below Beijing’s long-term inflation target of around 3%, suggesting domestic consumption is still far from robust.

Zichun Huang, China economist at Capital Economics, attributes the modest CPI rebound to a government-backed trade-in stimulus for consumer goods, including appliances, electronics, and electric vehicles. “That tailwind will likely fade in the second half of the year,” Huang warned, “especially if overcapacity remains unresolved.”

Deflation Fueled by Price Wars and Weak Demand

One of the most pressing issues behind the continued deflation is the aggressive pricing competition—commonly referred to as “involution” or “neijuan” in China. This dynamic has seen manufacturers slash prices in a desperate bid to attract consumers and clear bloated inventories. However, these price cuts have failed to reignite significant consumer demand, and profits have taken a serious hit.

Industrial profits plummeted 9.1% in May compared to a year earlier, the steepest decline since October 2024. This decline underscores how Chinese companies are struggling to maintain margins amid razor-thin pricing and falling global demand.

At a high-level economic policy meeting chaired by President Xi Jinping last week, Chinese officials sharply criticized excessive price competition. The leadership vowed to tighten regulations on predatory pricing and called for companies to focus on quality improvement and phasing out obsolete production capacity.

A commentary in a state-backed publication following the meeting emphasized the need for “orderly industrial restructuring” and suggested that policy enforcement will be stepped up in the coming months.

Exports Offer Temporary Relief but Not a Long-Term Fix

Despite the domestic slowdown, China’s exports have shown surprising strength in recent months, providing temporary relief to Beijing’s policy strategists. Total exports rose 4.8% year-on-year in May and 8.1% in April, with a surge in shipments to Southeast Asia partially offsetting reduced U.S. orders due to ongoing tariff volatility.

But even this growth may not be sustainable. “Policymakers are hesitating to roll out strong stimulus because export numbers have been decent,” said Larry Hu, chief China economist at Macquarie. “However, without a meaningful rebound in domestic demand, it’s hard to avoid the deflationary spiral.”

Hu believes Beijing will continue its wait-and-see approach until there’s a sharp downturn in export figures, which may then trigger broader economic stimulus. But until then, “deflationary forces will persist, and businesses will continue operating under pressure,” he said.

What Lies Ahead: Policy Intervention or Prolonged Stagnation?

Economists agree that without bold policy intervention, China risks falling into a deeper and more prolonged cycle of deflation and stagnation. While monetary easing measures and fiscal support have been discussed, the central government has so far refrained from rolling out aggressive stimulus—citing concerns about financial risks and long-term sustainability.

Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, noted, “It’s too early to call an end to deflation. The property sector remains weak, and the government’s campaign against price wars is still in its early stages.”

For now, the markets appear to be holding steady. The mainland’s CSI 300 index rose 0.19% following the data release, suggesting that investors are still cautiously optimistic about potential policy responses.