China’s consumer inflation accelerated to its highest level in five months this January, signaling a mixed economic recovery as domestic spending showed uneven growth and industrial activity remained subdued. However, producer price deflation persisted, underscoring the challenges facing the world’s second-largest economy in 2025.
Consumer Inflation Rises
The consumer price index (CPI) rose by 0.5% in January compared to a year earlier, up from December’s modest 0.1% increase, according to data from the National Bureau of Statistics. This exceeded the 0.4% rise predicted in a Reuters poll of economists. Core inflation, which excludes volatile food and fuel prices, also climbed to 0.6% in January, up from 0.4% the previous month.
The uptick in inflation was partly driven by seasonal factors, as the Lunar New Year holiday – China’s most significant annual celebration – occurred in January this year, a month earlier than in 2024. This shift prompted consumers to stockpile food and other essential goods for family gatherings, leading to temporary price increases. Notable inflationary pressures were observed in sectors directly linked to holiday spending: airplane ticket prices surged 8.9%, tourism costs rose 7.0%, and movie and performance ticket prices jumped by 11.0%.
While these figures suggest a rebound in consumer spending, the broader picture remains tepid. Per capita spending during the holidays grew by just 1.2% year-over-year, a sharp slowdown from 2024’s 9.4% increase. Analysts attribute this to ongoing concerns about job security and wage growth.
Producer Deflation Persists
In stark contrast to the consumer inflation trend, China’s producer price index (PPI) fell by 2.3% in January compared to the same period last year. This marked the 28th consecutive month of deflation in factory-gate prices, highlighting persistent overcapacity in industrial production. The decline matched December’s drop and was deeper than the forecast 2.1% contraction.
Weak demand for industrial goods, compounded by global economic uncertainties and sluggish domestic activity, has made it difficult for producer prices to return to positive territory. Analysts, including Xu Tianchen from the Economist Intelligence Unit, predict that producer deflation will likely continue in the short term unless significant policy measures are introduced.
Economic Challenges Ahead
The uneven inflation data underscores the broader challenges facing China’s economy. Despite signs of recovery in consumer spending, structural weaknesses such as overcapacity in industrial sectors and uncertain domestic demand remain unresolved. Moreover, U.S. President Donald Trump’s tariffs on Chinese goods are adding pressure on Beijing to stimulate growth, particularly in its export-driven sectors.
China’s provinces have set economic growth targets for 2025, with most aiming for inflation rates below 3%, reflecting policymakers’ cautious approach amid growing economic uncertainties. Bruce Pang, adjunct associate professor at CUHK Business School, noted that these targets suggest policymakers are preparing for continued price pressures.
Calls for Stimulus Grow
China’s manufacturing sector contracted unexpectedly in January, while services activity also weakened. This has fueled calls for additional monetary and fiscal stimulus to support the economy. However, the government is unlikely to introduce major policy changes before its annual parliamentary session in March, according to Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
“For policymakers, external uncertainty seems to rank higher than domestic economic challenges at this stage,” Zhang said.
Outlook for 2025
Beijing is expected to retain its 2025 economic growth forecast of around 5%, but achieving this target will require navigating both domestic and international headwinds. Economists believe that rekindling domestic demand is essential to sustaining growth and alleviating deflationary pressures in the industrial sector.
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