China’s deflation near-miss isn’t the economic story of 2025

China did not slip into outright deflation last year and that in itself matters. When weak global demand, geopolitical frictions and a prolonged property correction weighed heavily on sentiment, consumer prices stayed marginally positive. The latest data suggests an economy not in free fall but navigating a transition towards more balanced and sustainable growth, albeit at a subdued pace.

December’s inflation figures underline this point. Consumer prices rose by 0.8 per cent year on year, the fastest pace since early 2023, and monthly inflation turned positive after a brief dip. While inflation for the full year was flat, well below Beijing’s target, the direction of travel matters. After years of near-zero price growth, the data indicates that deflationary pressure is easing rather than intensifying.

Food prices played a visible role in December’s uptick, reflecting seasonal factors and stabilising agricultural supply. Vegetable and fruit prices rose sharply, while the drag from pork prices has continued to ease. More importantly, core inflation has stabilised at around 1.2 per cent, its highest level in nearly two years. Although still modest by international standards, this suggests underlying price dynamics are no longer deteriorating.

Housing-related prices remain soft, with rents and residence costs still slightly negative year on year. Yet this reflects an adjustment in the property sector rather than a broader collapse in demand. In many cities, falling rents are helping to ease cost of living pressures and improve mobility, supporting longer-term rebalancing even as the sector works through excess supply.

Producer prices tell a similar story of gradual improvement. Factory-gate prices remained in deflation in December, but the pace of decline has moderated. After more than three years of falling producer prices, the stabilisation under way points to easing pressure on industrial margins as inventory adjustment progresses and external demand remains supportive. While overcapacity remains a challenge in some sectors, the worst of the price squeeze may be behind us.

Taken together, the data suggest China is not trapped in deflation but operating in a low-inflation environment consistent with a maturing economy. This reflects both cyclical weakness and structural change. Consumption growth has been cautious, but not collapsing, and export performance has provided a buffer during a period of domestic adjustment. Importantly, inflation expectations have not become unanchored, leaving policymakers with room to act.