Deflation fears grow as China’s inflation nears zero in December

China’s inflation data for December has raised fresh concerns over deflationary pressures, underscoring the persistent challenges facing the world’s second-largest economy as it grapples with weak domestic demand.

China’s consumer inflation edges lower

China’s consumer price index (CPI) rose just 0.1% year-on-year in December, according to data from the National Bureau of Statistics (NBS).

The reading matched consensus estimates but marked a slowdown from the 0.2% increase in November.

Core CPI, which excludes volatile food and energy prices, rose 0.4% year-on-year, slightly improving from a 0.3% gain in the previous month.

On a month-on-month basis, CPI remained flat, compared with a 0.6% decline in November.

Food prices weigh on inflation

Food prices fell 0.6% month-on-month, driven by favorable weather conditions.

Notable declines included a 2.4% drop in fresh vegetable prices and a 1% decrease in fresh fruit prices.

Pork prices, a critical component of China’s CPI basket, fell 2.1% month-on-month but remained elevated year-on-year, up 12.5%.

Wholesale prices continue to slide

Producer price inflation (PPI) fell 2.3% year-on-year in December, marking the 27th consecutive month of decline.

The figure slightly outperformed Reuters expectations of a 2.4% drop.

On a monthly basis, PPI slipped 0.1%, reversing a 0.1% rise in November.

According to the NBS, infrastructure and real estate project suspensions during the off-season reduced demand for steel and other materials, contributing to the decline.

What is behind deflation concerns in China?

The near-zero consumer inflation reflects China’s ongoing struggle with subdued domestic demand, raising fears of a deflationary spiral.

Despite various stimulus measures implemented by Beijing since September—such as interest rate cuts, support for the stock and property markets, and increased bank lending—consumer spending has yet to show significant improvement.

Earlier this week, China introduced a consumer trade-in scheme designed to encourage equipment upgrades and provide subsidies, aiming to stimulate consumption further.

China’s economic recovery

Some economic indicators suggest a potential for recovery.

Factory activity has expanded for three consecutive months, though at a slower pace in December.

President Xi Jinping’s administration has identified boosting domestic demand as a top priority for 2025, marking only the second time in over a decade that this issue has taken precedence.

Authorities have pledged to deploy greater public borrowing and fiscal spending, along with additional monetary easing, to stimulate growth.

China’s onshore yuan hit a 16-month low of 7.3316 against the US dollar on Wednesday, weighed down by strengthening US Treasury yields and a robust dollar.

The weakening currency underscores the broader challenges facing China’s economy as it strives to combat deflation and reignite growth momentum.

The coming months will be critical in determining whether Beijing’s policy measures can effectively counter deflationary pressures and revitalize domestic demand.

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