Markets were relatively quiet today, but China’s latest inflation data commands attention due to its implications for the global economy. December’s consumer price inflation (CPI) rose just 0.1% year-on-year, matching economist expectations but falling from November’s 0.2% increase. Meanwhile, producer price inflation (PPI) declined for the 27th consecutive month, down 2.3% year-on-year, slightly better than Reuters’ forecast of a 2.4% drop. These figures highlight ongoing deflationary pressures, fueled by weak domestic demand and lingering economic headwinds.

Key drivers behind the muted inflation include declining food prices—fresh vegetables and pork dropped 2.4% and 2.1% month-on-month, respectively—along with stagnant non-food prices. Seasonal slowdowns in infrastructure and real estate projects have further hurt demand for industrial inputs like steel, exacerbating deflation at the factory level. While core CPI, which excludes volatile food and energy prices, ticked up to 0.4% from 0.3% in November, this improvement is modest at best. Analysts note that China’s expansive stimulus measures, such as subsidies and trade-in schemes, have provided limited relief, with their effects likely to be short-lived.

Deflation Concerns and Policy Implications

China’s struggle with near-zero inflation underscores the challenges of reviving domestic consumption amid rising job insecurity, a prolonged real estate downturn, and sky-high debt levels. Despite Beijing’s efforts, including record fiscal stimulus and interest rate cuts, consumer sentiment remains subdued. Discounting trends across retail and discretionary sectors, such as bubble tea and electronics, reflect a cautious consumer base hesitant to spend without significant bargains.

Looking forward, analysts expect deflationary pressures to persist unless fiscal policies can meaningfully address structural issues like property sector woes and sluggish household spending. The National Bureau of Statistics’ data suggests that producer price deflation has slowed, potentially signaling some impact from government measures, but economists remain cautious. Julian Evans-Pritchard of Capital Economics anticipates that underlying inflation may weaken again later in 2025 as the effects of stimulus fade. Meanwhile, China’s onshore yuan hit a 16-month low against the dollar this week, further complicating the nation’s economic recovery efforts.

While there are glimmers of recovery in metrics such as factory activity, which has expanded for three consecutive months, China’s broader inflation outlook remains fragile. The combination of deflation risks, geopolitical tensions, and an uncertain global economic environment presents significant challenges for Beijing’s policymakers as they strive to stabilize the world’s second-largest economy.