China inflation hits near three-year high, but producer deflation signals weak demand

China’s Inflation and Producer Price Trends

China's Consumer Price Index (CPI) climbed to a year-on-year increase of 0.8% in December, marking the fastest rise since February 2023. This figure matched market expectations and surpassed November's 0.7% increase. Month-over-month, CPI rose by 0.2%, beating forecasts of 0.1%. On the other hand, Producer Prices Index (PPI) showed a year-on-year decline of 1.9%, slightly better than the expected 2.0% decrease, indicating a continued deflationary phase reflecting overcapacity in the manufacturing sector alongside weak pricing power. Core inflation remained unchanged at a 1.2% year-on-year rate, suggesting modest underlying price pressures. Food prices increased by 1.1% and non-food prices by 0.8%.

Weak Demand Signals

Economists highlight these data points as indicative of fragile domestic demand, despite overall growth being largely on track. Macquarie forecasts that China’s consumer inflation will remain flat until 2025, with producer price deflation possibly deepening. While further policy easing is anticipated to support the market, declining corporate profits and renewed price competition continue to pose risks to confidence. The market remains tense, with policymakers needing to stabilize consumption and the property sector, leaving uncertainty over potential impacts on stock and currency markets.