China’s inflation rate hit near three-year high in December as full-year CPI missed target

China’s consumer inflation accelerated to its highest pace in nearly three years in December as spending rebounded ahead of the Lunar New Year holiday, but factory-gate deflation remains persistent, indicating underlying demand remains weak.

Consumer prices rose 0.8% year-on-year, the highest level since February 2023, according to data from the Office for National Statistics on Friday. The improvement followed a 0.7% rise in November and was in line with economists’ forecasts in a Reuters poll.

The recovery in consumer prices was mainly due to fresh vegetables, which rose 18.2% year-on-year due to supply shortages during the cold winter. Among other food items, pork prices fell by 14.6%.

Core inflation, which excludes volatile food and energy prices, rose 1.2% in December from a year earlier, unchanged from the previous month’s growth.

On a monthly basis, consumer prices rose 0.2%, beating the 0.1% rise expected in a Reuters poll.

Still, inflation is expected to remain flat for 2025 overall, falling short of the official target of around 2%, indicating that the Chinese government’s previous stimulus measures, such as the consumer goods trade-in program, have done little to stimulate demand.

Producer prices in December fell 1.9% compared to the same month last year, exceeding the expected 2% decline, extending the deflationary streak for more than three years. The decline slowed down from the 2.2% decline in November, due in part to the rise in prices of non-ferrous metal materials.

Prices of durable consumer goods fell 3.5% from the previous year.

NBS chief statistician Lijuan Dong said gold jewelery prices rose 68.5% in December compared to the same month last year due to a global rush to buy the precious metal amid recession fears and market uncertainty.

Although China is on track to meet its growth target of about 5% last year, the economy continues to face deflationary pressures. Consumers remain reluctant to spend amid an uncertain job outlook and a prolonged real estate crisis that has eroded household wealth.

Larry Hu, Macquarie’s chief China economist, expects China’s annual consumer inflation rate to remain flat in 2025, while producer price deflation is expected to be 2.7%, which would be the longest continuous stretch of deflation in history.

A team of economists at Bank of America Global Research predicted that China’s real GDP growth rate is likely to slow to 4.5% in the fourth quarter from 4.8% in the third quarter.

The Wall Street bank said the contraction in fixed asset investment was about 11.8% year-on-year in December, compared with an 11.1% decline in November, and was likely to contract further. Industrial production growth is estimated to have reached a modest 4.9%, supported by a recovery in manufacturing activity and the “usual year-end acceleration of production.”

China’s manufacturing activity unexpectedly expanded in December, ending a record eight consecutive months of decline. The official Purchasing Managers Index (PMI) rose to 50.1 from 49.2 last month, above the 50-point mark that separates growth from contraction.

At a key economic policy meeting in early December, ruling Communist Party leaders reiterated plans to boost consumption and stabilize the real estate market, although similar pledges in the past have failed to yield meaningful results.

A recent article in the Communist Party’s flagship magazine, Qushibao, called for “implementation of a stronger and more comprehensive package of measures to stabilize the real estate sector, rather than a piecemeal approach.”

Macquarie’s Hu said the government may come up with further easing measures in the short term, such as lowering mortgage rates and easing restrictions on home purchases. But these measures “may not be strong enough to reverse the trend,” Hu warned, predicting that new home sales floor space would decline by 7% in 2026, after falling by 8% in 2025.

Chinese policymakers are also stepping up efforts to rein in fierce price competition that hurts company profitability, ordering production cuts in some sectors to curb oversupply.

Still, industrial company profits fell 13.1% in November from a year earlier, the biggest drop in a year.

Domestic automakers rolled out new price cuts and benefits earlier this year as demand remained weak and the government withdrew some tax incentives for eligible electric vehicles.

Factory prices in the auto manufacturing industry fell by 2.8% in 2025. According to official data, prices of gasoline cars and new energy vehicles fell by 2.4% and 2.2% year-on-year in December, respectively.