China's inflation rate in December 2025 rose to 0.8% YoY, the highest level since February 2025, up from 0.7% YoY in November. However, this increase in inflation does not reflect a recovery in domestic demand, as consumption remains weak. Various stimulus measures, such as the trade-in program for consumer goods, have had limited effects on restoring confidence and alleviating deflationary pressures.

For the entire year of 2025, China's consumer inflation was at 0%, the lowest level in 16 years and below the inflation target of 2%. This indicates that past economic stimulus measures have been insufficient to restore consumer confidence amid ongoing pressures from a prolonged real estate crisis, a weak labor market, and intense price competition in the manufacturing sector.

Structurally, the increase in inflation in December was primarily driven by rising food prices, particularly fresh vegetables and beef, which rose by 18.2% YoY and 6.9% YoY, respectively. Meanwhile, pork prices fell by 14.6% YoY. Inflation in the miscellaneous goods and services category accelerated to 17.4% YoY, mainly due to rising gold prices, rather than a broad recovery in consumption. Conversely, core inflation (Core CPI) remained steady at 1.2% YoY for the third consecutive month, indicating that price pressures from the demand side remain low, while car prices continue to decline due to fierce price competition.

In the manufacturing sector, the Producer Price Index (PPI) in December 2025 was at -1.9% YoY, contracting for the 39th consecutive month. Although it showed improvement from previous periods, it still reflects a prolonged deflationary state in the industrial sector. As a result, the PPI for the entire year of 2025 was at -2.6%, marking a third consecutive year of contraction due to excess production capacity, intense price competition, and limited recovery in domestic demand. Some industries supported by the government, such as advanced technology, batteries, semiconductors, and steel, are beginning to see signs of price recovery.

KResearch estimates that China's inflation rate in 2026 is likely to recover slightly but will remain low, with ongoing deflation risks pressuring domestic spending. Key supporting factors include:
The low base effect from food prices that were in a deflationary state for most of 2025.
The recovery cycle of pork prices, which helps reduce negative pressures on food inflation.
China's Anti-Involution measures aimed at reducing price competition that undermines profits and stability in the industrial sector.

However, while these measures may help alleviate some supply-side deflationary pressures, they cannot fully compensate for the recovery of domestic demand, leaving deflation risks as a significant constraint on China's economy in 2026.