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China's consumer price index inflation rose 0.8% year-on-year in December to a 34-month high, bringing the full-year CPI to 0.0%. This indicates that China avoided deflation in 2025. Inflation has shown signs of bottoming out and should pick up further in 2026 

Inflation continues to trend higher
 

China's consumer price inflation rose 0.8% year-on-year in December, up from 0.7%, the highest level since February 2023. The read came in line with market expectations.

As in November, the acceleration in inflation remains primarily attributable to rising food prices. Food inflation picked up to a 1.1% pace YoY, a 14-month high. Fresh vegetable and fresh fruit prices saw the largest month-on-month upticks -- up 18.2% and 4.4% YoY, respectively. Pork prices continued to fall, but saw a slightly smaller drag in year-on-year terms, rising 0.4pp to -14.6% YoY. The YoY level has risen for three consecutive months. We expect the drag from pork price deflation to turn around this year.

Non-food inflation, on the other hand, remained unchanged at 0.8% YoY. Household appliance prices rose 5.9% YoY as we began to see an impact from 2024's trade-in policy discounts feed through the economy. Services inflation, in the form of tourism (2.1%) and healthcare (2.9%), generally outpaced goods inflation. The transportation and communication category continued to weigh on inflation, down 2.6% YoY, primarily due to declines in transportation (-1.9%), fuel (-8.2%), and communication appliances (-0.7%). We’re also seeing the continued impact of the property market malaise, with the residence component of inflation in deflation at -0.2% YoY, driven by a -0.3% YoY drop in rents.

Core inflation was unchanged for a third consecutive month at 1.2% YoY.

Producer price index inflation rose to -1.9% YoY, up from -2.2% in November. This level marked a 16-month high and the 39th consecutive month of PPI deflation.

Food prices continued to push inflation higher in December
 

Is the worst over for China's deflationary pressure?
 

After three straight years of deflationary pressures, could we finally see inflation pick up a little more convincingly in 2026?

Various factors suggest that this could be possible:

• Non-food inflation shows a mixed picture but has generally been benign in 2H25.
• Food prices were in deflation for 9 of 12 months in 2025, and the base effect will likely lead to a pickup in YoY levels in 2026. A turnaround of the pork cycle would further contribute to upward food prices.
• China's anti-involution push could help alleviate downward price pressures, though it remains unclear how much of an impact we will see.
• Potential new avenues for supporting consumption on top of trade-in policies, which, thanks to discounts, tend to exacerbate deflationary pressure.

As such, we're looking for 0.9% CPI inflation in 2026. While this remains well short of the 2% inflation target pursued by many central banks globally, it would nonetheless be a healthy development after three consecutive years of annual CPI inflation of 0.2% or lower. Despite expectations of a recovery, inflation remains relatively low and should not preclude further monetary easing this year. We continue to expect there's a case for further rate cuts this year, with a 10 bp cut sometime in 1H26.

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