Key Takeaways

China's economy narrowly sidestepped a damaging deflationary spiral in 2025, with December CPI inflation reaching 0.8% year-on-year—a 34-month high. The full-year CPI reading of 0.0% officially avoids an outright annual deflation print. While food prices, led by fresh produce, are the primary driver, underlying price pressures remain weak, with core inflation steady and property-related categories still in deflation. This fragile recovery keeps the door wide open for further monetary easing by the People's Bank of China (PBoC) in 2026.

Decoding China's Inflation Rebound: A Fragile Victory

The release of China's December and full-year 2025 inflation data marks a critical inflection point for the world's second-largest economy. After years of flirting with deflation, a December CPI print of 0.8% y/y—matching expectations and the strongest since February 2023—provides a psychological boost. More importantly, it drags the full-year average to precisely 0.0%, allowing Beijing to claim it has avoided the technical definition of annual deflation. However, as ING analysts note, this is a recovery born of modest, specific factors rather than broad-based demand strength. Price pressures remain "subdued and well below levels seen in other major economies," painting a picture of an economy still in need of substantial policy support.

The Food Price Engine: Pork Drag Eases, Vegetables Surge

The headline inflation number is being almost single-handedly carried by the food basket. Food prices rose 1.1% y/y in December, a 14-month high. This surge is attributed to sharp gains in fresh vegetable and fruit prices, likely influenced by seasonal weather disruptions and supply chain factors. The more significant narrative for traders is the evolving story of pork prices. As a massive component of China's CPI basket, pork has been a persistent deflationary anchor for years. The latest data shows the year-on-year decline is narrowing for a third consecutive month, meaning its drag on the overall index is lessening. Analysts project the pork cycle could turn later in 2026, which would shift it from a deflationary weight to a modest source of upward price pressure, providing a more durable floor under food inflation.

Underlying Weakness: The Core and Property Story

Beneath the food-driven headline, the picture is mixed and reveals the economy's persistent soft spots. Non-food inflation was unchanged at 0.8%. A bright spot was household appliances, where prices rose sharply, likely reflecting the delayed pass-through of government-sponsored trade-in subsidy programs. Services inflation, particularly in tourism and healthcare, also continued to outpace goods prices, a sign of shifting consumer spending patterns post-pandemic.

However, the property sector's profound slump continues to exert a powerful disinflationary force. Rents and residence costs are still falling, directly weighing on the CPI. This housing deflation acts as a constant counterbalance to price gains elsewhere. Furthermore, core CPI (excluding food and energy) remained stuck at 1.2% for a third consecutive month. This steadiness indicates that underlying, demand-driven inflationary momentum is virtually absent.

Producer Deflation: A Long Road to Recovery

The situation at the factory gate underscores the challenge. The Producer Price Index (PPI) remained in deflationary territory at -1.9% y/y in December. While this marks a 16-month high and an easing from deeper negatives, it extends a deflationary streak approaching three and a half years. This persistent PPI deflation reflects ongoing industrial overcapacity, weak global demand for manufactured goods, and soft domestic commodity prices. It eventually feeds into consumer prices, capping the upside for CPI. The ING assessment that "the worst of China’s deflationary pressure may be behind it" is cautiously optimistic, but it emphasizes that any recovery will be "gradual."

What This Means for Traders

The inflation data provides a crucial roadmap for positioning across asset classes in 2026:

  • FX (CNH Pairs): The confirmation of contained inflation is a green light for PBoC easing. Anticipate further rate cuts and reserve requirement ratio (RRR) reductions. This is fundamentally bearish for the Chinese Yuan (CNH) against the USD, especially if the Federal Reserve remains on hold. Look for opportunities to short CNH against currencies of central banks that are tighter, like the USD or potentially the JPY if the Bank of Japan continues its normalization path.
  • Commodities: The data is a mixed bag. Industrial metals may see limited upside due to the lingering PPI deflation and property weakness, suggesting demand from China's construction sector will remain tepid. However, agricultural commodities, particularly pork and softs like vegetables, warrant close watch. A turning pork cycle could trigger volatility in related futures (e.g., lean hogs on CME, soybean meal).
  • Equities (A-Shares, HK): Sectors tied to consumer staples and discretionary spending linked to government subsidies (like appliances) may see support. However, the property sector remains a key risk. The expectation of further easing is generally equity-positive, as it lowers financing costs and boosts liquidity. Traders should monitor financial stocks for reactions to policy moves and consumer-focused ETFs for plays on the mild consumption recovery.
  • Fixed Income & Policy Trades: The clear path for monetary easing makes Chinese government bonds attractive. Expect yields to trend lower or remain suppressed. The market will now focus on the timing and magnitude of the next move, with a 10-basis-point policy rate cut in H1 2026 being the consensus expectation. Trading the steepening or flattening of the yield curve in response to specific PBoC actions will be a key theme.

The Road Ahead: Modest Inflation and Certain Easing in 2026

Looking forward, the trajectory is set for a year of modest improvement but profound policy divergence. Analysts forecast average CPI inflation of around 0.9% for 2026—a figure that, while improved, remains dangerously low and far from the PBoC's implicit target. This environment of contained price pressures eliminates a major barrier to aggressive stimulus. The government's priority will remain squarely on bolstering growth, stabilizing the property market, and boosting consumer confidence.

For global markets, China's ongoing disinflationary bias and commitment to easing mean it will continue to export cheap goods, helping to keep a lid on global manufactured goods inflation. It also creates a divergent monetary policy path with major Western central banks, driving capital flow and currency dynamics. The December 2025 data is not a signal of a roaring comeback, but rather evidence that the economy has found a fragile equilibrium at the zero line. The PBoC's work is far from over, and traders should position for a year where policy support, not organic inflation, remains the dominant market force.