China avoids deflation in 2025 as inflation edges greater, easing nonetheless possible

Summary:

• China CPI rose 0.8% y/y in December, a 34-month high

• Full-year CPI at 0.0%, avoiding outright deflation

• Food prices driving gains; pork drag easing

• Core inflation steady, property prices still deflationary

• Further monetary easing seen as likely

China narrowly avoided outright deflation in 2025, with consumer inflation ending the year at its highest level in nearly three years, though, analysts at ING caution that price pressures remain subdued and well below levels seen in other major economies.

China’s consumer price index (CPI) rose 0.8% year-on-year in December, the strongest reading since February 2023 and in line with market expectations. That brought full-year CPI inflation to 0.0%, allowing China to sidestep an annual deflation print, following several years of near-zero inflation.

The pickup in headline inflation continues to be driven largely by food prices, which rose 1.1% year-on-year, a 14-month high. Fresh vegetable and fruit prices recorded the sharpest gains, while pork prices — still deeply negative — have become less of a drag, with the year-on-year decline narrowing for a third consecutive month. Analysts expect the pork cycle to turn later this year, potentially adding modest upward pressure to food inflation.

By contrast, non-food inflation remained unchanged at 0.8%, reflecting a mixed underlying picture. Household appliance prices rose sharply as the effects of earlier trade-in incentives fed through, while services inflation — particularly tourism and healthcare — continued to outpace goods prices. However, deflation persisted in housing-related categories, with rents and residence costs still falling amid ongoing property-sector weakness.

Core inflation, which strips out food and energy, was steady at 1.2% for a third straight month, suggesting underlying price momentum remains limited.

At the producer level, PPI deflation eased to –1.9% year-on-year, marking a 16-month high but extending a deflationary streak now approaching three and a half years. The ING note argues that while the worst of China’s deflationary pressure may be behind it, any recovery in inflation is likely to be gradual.

Looking ahead, analysts forecast CPI inflation of around 0.9% in 2026, a modest improvement but still low by global standards. With inflation contained, they see scope for further monetary easing, including the possibility of a 10-basis-point rate cut in the first half of 2026.