Growth Signals Emerge: Core CPI Peaks as Policy Support Accelerates Demand Transmission

China's policy transmission mechanism is proving more effective than headline inflation metrics suggest. When the People's Bank of China pledged "counter-cyclical measures" in November 2024, the immediate market reaction focused on the Federal Reserve's easing cycle and fiscal stimulus approved by lawmakers. Yet the most telling data emerged in producer prices: the November PPI decline narrowed to 2.5% YoY from 2.9% in October, marking the first improvement in half a year, according to a People's Daily Online report. This subtle rebound-anchored in surging demand for construction materials like cement and steel-reveals how policy levers translate into tangible economic activity. The National Bureau of Statistics explicitly linked the pickup to "implemented and incremental economic policies," noting synchronized growth in real estate and infrastructure projects as the engine, as reported by a CGTN report.

The nuance here matters. While consumer prices remained stagnant (CPI fell 0.6% MoM in November), the PPI recovery signals that policy isn't stuck in transmission limbo. Construction and manufacturing sectors, long burdened by deflationary pressure, are now absorbing stimulus through accelerated project timelines and supply chain activation. This doesn't resolve the consumer confidence gap-analysts cite "weak household sentiment" as a headwind, as noted in the CGTN report-but it does confirm that liquidity is reaching real economy channels. The falsifier, however, remains the pace of inventory destocking: if industrial output fails to sustain momentum beyond temporary policy-driven spikes, the transmission mechanism risks hitting diminishing returns. For now, though, the narrowing PPI gap is the clearest evidence yet that China's growth offensive is finding its footing-not through consumer fireworks, but through the steady hum of factories and cranes.

China's November data painted a nuanced picture of domestic demand's evolution. While consumer inflation remained subdued-CPI rising just 0.2% year-on-year after October's 0.3% gain-the first tangible cracks in industrial deflation emerged as PPI's annual decline narrowed to 2.5%, the shallowest since June 2024, according to the People's Daily Online report. This divergence signals fragile but real momentum in capital-intensive sectors, with infrastructure and real estate projects driving modest price rebounds in cement, steel, and metals, as reported by the People's Daily Online. Economists attribute the PPI improvement to accelerated construction activity, as noted in the CGTN report, though monthly CPI still fell 0.6%, underscoring persistent consumer price stickiness.

For growth-oriented investors, the key implication lies in industrial demand's trajectory. If infrastructure spending continues to lift PPI trends, cyclical sectors like construction materials could see margin expansion and higher earnings visibility. However, weak consumer pricing power-evidenced by core CPI's muted 0.3% YoY rise-suggests household balance sheets remain constrained, tempering broad-based consumption-led recovery. The falsifier here is a PPI retreat below 3% YoY decline: if industrial price pressures stall, monetary easing may fail to catalyze private investment.

Valuation-wise, this dichotomy favors sectors benefiting from policy-driven demand over discretionary consumption. Construction-linked equities, for instance, could trade at elevated multiples if PPI trends sustain, while FCF improvements in industrial firms may offset weak retail sector margins. The narrative hinges on whether infrastructure-led price recovery translates to higher EPS-currently, the signal is promising but unproven.

Looking beyond fundamentals, three near-term catalysts could sway sentiment in the coming weeks. First, the central bank's commitment remains the baseline scenario. Governor Pan's November 2024 pledge to maintain "supportive monetary policy" and deploy "counter-cyclical measures" was highlighted in a CNBC report, creating a floor for risk asset positioning, especially as local government debt limits expanded during the same session. That's the baseline. Now the caveats: October 2025's CPI showed unexpected resilience, as reported by a Bloomberg report, but November 2024's core components remain unreported-any deviation from the soft-landing narrative here could trigger sharp repricing.

Second, the Federal Reserve's easing cycle synchronization matters. Pan specifically noted China's moves "coinciding" with the Fed's accommodative shift, as noted in the CNBC report, meaning dollar liquidity conditions will influence capital flows into Asian markets. A stall in U.S. monetary easing could force premature exits from growth assets. Third, November's missing core CPI data presents a silent trigger. If readings surprise on the hawkish side when released, it could accelerate tightening bets globally-especially if energy or housing components defy expectations.

This sets up a binary outcome in Q1 2025: aggressive policy support sustains risk appetite, while inflation surprises could force recalibration. Our growth-focused stance remains intact unless either the PBOC reverses or core inflation acceleration persists beyond October's 0.2% YoY increase, as reported by the China Daily report. For now, the trend outweighs the noise.

Despite persistent worries about deflationary pressures, China delivered a core inflation surprise in November. The core CPI figure, stripping out volatile food and energy prices, climbed to a 20-month high of 0.3% YoY, edging up from October's 0.2%, as reported by a Xinhua report. This stubbornness in the underlying price trend provides some breathing room for policymakers, softening the immediate pressure for aggressive stimulus. While headline CPI rose just 0.2% YoY, slightly below October, and even slipped 0.6% month-on-month, as reported by the China Daily report, it's the resilience of core inflation that catches market attention. Experts point to bolstered domestic demand and seasonal supply constraints as key drivers behind this core strength, as noted in the China Daily report. This divergence suggests pricing power is slowly returning in services and non-energy goods, a positive sign for corporate margins. However, the sharp monthly decline in headline CPI acts as a crucial falsifier, reminding us that broader disinflation risks, particularly in goods, remain very much alive. The core reading isn't a signal for policy tightening, but rather evidence that the economy's recovery path is still uneven. Investors watch cautiously: this resilience offers time for space in the growth offensive, but the monthly weakness tempers optimism, demanding scrutiny of whether core inflation's momentum can be sustained beyond seasonal bumps.