China’s latest inflation figures reveal a significant slowdown in consumer price growth, rising only 0.2% year-on-year in January, falling short of economists’ expectations. This marks a considerable decrease from December’s 0.8% and raises fresh concerns about deflationary pressures within the world’s second-largest economy. Meanwhile, producer prices continued their decline, though at a moderated pace.
The January CPI reading of 0.2% was primarily influenced by a sharp decline in food prices, which fell 0.7% year-on-year. This contrasts with the previous month, where food prices saw a notable increase. Non-food inflation also softened, dropping to 0.4% year-on-year, reaching a six-month low. Categories like transportation and communication, as well as travel and tourism services, experienced price decreases.
Experts suggest that the shift in the Lunar New Year holiday timing between January 2025 and February 2026 has created a statistical anomaly, making direct month-on-month comparisons difficult. Last year’s January data included more holiday-related price strength, which is absent this year. Analysts recommend viewing January and February data collectively for a clearer picture.
China’s producer price index (PPI) declined by 1.4% in January, an improvement from the 1.9% decrease seen in December. On a month-on-month basis, producer inflation saw a 0.4% increase, marking the fourth consecutive month of sequential gains. This uptick was partly driven by a surge in global gold prices, which influenced non-ferrous metal input prices.
Despite this slight improvement, the persistent deflation in factory-gate prices, which has lasted over three years, continues to impact manufacturers’ profitability. This is exacerbated by tepid consumer confidence and ongoing economic challenges, including a prolonged property downturn.
The subdued inflation data comes as China grapples with broader economic imbalances, including overcapacity in certain industries and weak consumer spending, despite government incentives like trade-in programs. The government is expected to unveil its economic targets for the year at an upcoming parliamentary meeting, with analysts anticipating an inflation target around 2%.
While the current inflation levels are well below the target, the People’s Bank of China is unlikely to let this significantly alter its monetary policy trajectory. The central bank has reiterated its commitment to “appropriately loose” monetary policies to support economic recovery and guide prices. However, concerns remain about the effectiveness of stimulus measures, with policymakers prioritizing investment-driven growth while viewing consumption support as a potential one-time boost that could add to debt burdens.