China's economy witnessed a significant upturn in December, as the Consumer Price Index (CPI) rose by 0.8% year-on-year, reaching its highest level in 34 months. This increase brings the full-year CPI to 0.0%, effectively allowing China to avert deflation in 2025. The primary catalyst for this inflationary trend was the surge in food prices, particularly fresh produce, which overshadowed stable non-food inflation figures.
December Inflation Surge Driven by Food Costs, Monetary Easing Expected in 2026
In December, China's consumer price inflation saw a notable acceleration, reaching 0.8% year-on-year, an increase from the previous month's 0.7%. This marked the highest inflation rate since February 2023. The key driver behind this upward movement was the consistent rise in food prices. Specifically, fresh vegetable prices jumped by 8.6% month-on-month, contributing significantly to the overall CPI increase. Additionally, fruit prices saw a 1.7% monthly rise, while pork prices, which had previously experienced deflation, showed signs of moderating their decline, falling by a smaller 2.6% year-on-year compared to November's 13.6% decrease.
Conversely, non-food inflation remained stable at 0.8% year-on-year, indicating that the broader economy was not experiencing widespread price pressures beyond the food sector. Despite the recent uptick, the full-year CPI for 2025 settled at 0.0%. Looking ahead to 2026, economists anticipate that China's inflation will remain subdued, likely hovering around 0.9%, which is below global targets. This outlook suggests that the People's Bank of China may implement further monetary easing measures. A 10 basis point interest rate cut is projected for the first half of 2026, aimed at stimulating economic activity and preventing a return to deflationary pressures. Several factors could contribute to an upward movement in inflation in 2026, including a potential reversal in pork prices, the fading impact of prior food deflation, the implementation of anti-involution policies, and new government initiatives to bolster consumer spending.
The latest inflation data provides a clearer picture of China's economic landscape, highlighting the delicate balance between managing price stability and fostering growth. The reliance on food prices to drive inflation underscores potential vulnerabilities in the supply chain and agricultural sector. Moving forward, policymakers will need to carefully monitor these trends and implement targeted measures to ensure a stable and prosperous economic environment.