China’s economic indicators saw notable shifts during December, with consumer price inflation accelerating to its highest level in three years, a move reflecting selective price pressures, while the production sector continues to suffer from persistent contraction, sending mixed signals about the recovery of the world’s second-largest economy.
Food-driven surge in consumer prices
According to data released by China's National Bureau of Statistics, the Consumer Price Index (CPI) rose 0.8% year-on-year, its highest reading since February 2023, surpassing November's 0.7% increase. On a monthly basis, prices rose 0.2%, exceeding expectations of a 0.1% increase.
This increase is primarily attributed to a significant jump in food prices, particularly fresh vegetables, which saw a year-on-year price surge of 18.2%. This sharp rise was a consequence of harsh weather conditions and severe cold waves that struck the country during the winter, disrupting supply chains and leading to shortages in the markets.
Continued deflation of producer prices
Conversely, despite rising consumer prices, the manufacturing sector continues to face significant challenges. The Producer Price Index (PPI) fell by 1.9% year-on-year in December, compared to 2.2% in November. While this reading was slightly better than the expected 2% decline, it confirms that factory prices have been deflating for more than three consecutive years, indicating weak industrial demand and persistent deflationary pressures on businesses.
Gold as a safe haven and core inflation stability
In a related context, Lijuan Dong, chief statistician at the bureau, explained that gold jewelry prices saw a record increase of 68.5% year-on-year. This surge reflects consumers and investors turning to gold as a safe haven amid fears of economic recession and volatility in global financial markets.
Core inflation, which excludes volatile food and energy prices, held steady at 1.2% year-on-year, unchanged from the previous month, suggesting that underlying domestic demand still needs stronger catalysts for sustainable growth.
Economic context and recovery challenges
This data comes at a sensitive time for the Chinese economy, which is trying to regain momentum after years of pandemic-related lockdowns and a real estate crisis. The discrepancy between rising food prices and falling producer prices points to a dilemma facing monetary policymakers in Beijing; while food prices are squeezing consumers' pockets, factories are forced to lower their prices to sell off stock, threatening profit margins and employment.
Analysts believe that continued deflation in producer prices could have global repercussions, as it could lead to the export of deflation to global markets via cheap Chinese goods, which could help global central banks in their battle against inflation, but at the same time reflects a weakness in the engine of global growth.
