China’s December Inflation Uptick Fails to Ease Deflation Concerns

China’s December Inflation Uptick Fails to Ease Deflation Concerns

China’s December inflation data delivered a modest headline improvement, but the broader message remains unchanged: domestic demand is still weak, factory-gate deflation is entrenched, and household and business confidence remain under pressure.

Consumer prices rose 0.8% year on year in December, the fastest pace since early 2023 and slightly above November’s 0.7% increase. On a month-on-month basis, consumer prices climbed 0.2%. The rise was broadly in line with expectations and was supported by seasonal spending ahead of the New Year holiday.

The inflation drivers, however, were narrow and largely supply-driven. Fresh vegetable prices surged more than 18% from a year earlier as winter conditions squeezed supply. Pork prices fell about 15%, highlighting that broad-based food inflation is not building. Core inflation, which excludes food and energy, held at 1.2% year on year, suggesting underlying price momentum remains stable but subdued rather than accelerating.

For 2025 as a whole, consumer inflation was essentially flat, falling well short of the official target of around 2%. That outcome underscores how policy support implemented so far, including consumer-goods trade-in programs and targeted subsidies, has not generated a sustained rebound in household demand.

Producer prices still point to deflation risk

The producer price index remained in deflation. Factory-gate prices fell 1.9% year on year in December, extending a deflationary streak that has lasted more than three years. The decline was slightly less severe than November’s 2.2% drop, helped by firmer pricing in some industrial materials, but the overall pattern continues to signal weak pricing power across manufacturing.

Deflation is also visible in consumer-related production. Prices for durable consumer goods fell about 3.5% from a year earlier, an indication that manufacturers are still cutting prices to move inventory and defend market share. That pressure has fed through to profitability, with industrial profits posting a steep year-on-year decline in November.

Some pockets of inflation remain idiosyncratic. Gold jewelry prices jumped sharply in December as demand for perceived safe-haven assets rose amid global uncertainty. While that supports a narrow category of discretionary spending, it does not change the broader story of cautious consumers.

Property and employment continue to weigh on spending

China’s property downturn remains a significant constraint on sentiment and consumption. Real estate investment fell sharply over the first 11 months of the year, and housing price declines across major cities have continued. With property still the largest store of wealth for many households, falling prices have eroded perceived wealth and encouraged precautionary saving.

Auto demand has also weakened, further straining retail activity. Passenger vehicle retail sales by volume fell in November for the first time in three years, a reversal partly linked to reduced trade-in incentives in some regions. Automakers have responded with fresh rounds of price cuts and promotions, especially in new-energy vehicles, reinforcing the view that competition remains intense and demand is not strong enough to absorb supply at stable prices.

Online spending patterns tell a similar story. Even with extended promotions around the year’s biggest e-commerce sales period, overall growth has slowed compared with prior years, suggesting that discounts are pulling purchases forward rather than triggering a meaningful uplift in underlying demand.

Policy support is building, but skepticism persists

Policymakers have reiterated their intent to boost consumption, stabilize the property market, and support investment. Fiscal plans include issuing ultra-long-term special government bonds to fund priority projects, equipment upgrades, and consumer-goods trade-in programs. Authorities have also signaled higher budget allocations to arrest the slide in fixed-asset investment.

Even so, many analysts remain cautious about the likely impact. The central concern is that targeted measures may not be sufficient to change behavior without clearer improvement in job prospects, wage growth, and private-sector confidence. Without stronger income expectations, households may continue to save rather than spend, limiting the inflation rebound and keeping deflationary pressure in place.

Mixed signals from activity data and trade

There are some stabilizing signals. The official manufacturing purchasing managers’ index returned to slight expansion in December after an extended contraction, suggesting that production may be finding a floor. However, labor market indicators remain uneven, with youth unemployment still elevated on the latest readings, a headwind for consumption and confidence.

Exports continue to provide important support for headline growth. China’s trade surplus reached a new record by late 2025, helping the economy stay near its official growth target. Yet that strength has also intensified concerns that growth remains overly dependent on external demand and a competitive currency, rather than a durable recovery in domestic consumption. International institutions and many private economists have urged faster progress toward a more consumption-led model, supported by stronger household balance sheets and a more predictable environment for private business investment.

For now, December’s inflation pickup looks more like a seasonal and supply-driven bump than the start of a sustained reflation cycle. With producer prices still falling, profit pressure lingering, and households remaining cautious, China’s key challenge in 2026 will be turning policy intentions into a clearer improvement in demand, incomes, and confidence.