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China's December CPI Plummets to 0.2%, Deflationary Gloom Returns, Pressure on PBOC for RRR Cut Intensifies

By AI Insights

2026-02-12

Trend analysis based on the updated indicator. View the Indicator→

According to the latest data, China's Consumer Price Index (CPI) year-on-year growth rate was reported at 0.2% in December 2025, a significant slide from 0.8% in November. This not only interrupted the reflation momentum that briefly emerged at the beginning of the fourth quarter but also pushed closer to the zero line. Looking back at the full year of 2025, CPI fell into negative territory multiple times (such as -0.7% in January and -0.4% in July). The sharp decline in December reaffirms the fragility of domestic demand repair, showing that the economy is still struggling in a "low inflation trap."

Looking deeply into the details, the main reasons for this data pullback likely stem from food price fluctuations and cooling demand in the service sector. Although the timing mismatch effect of the Spring Festival (Lunar New Year) usually causes interference in December and January data, such a drastic decline implies deeper structural weakness. In particular, the cyclical decline in pork prices, combined with energy prices affected by the slowdown in global demand, offset some gains in the core service sector. Furthermore, the continuous adjustment of the real estate market has led to a shrinking of household balance sheets, further suppressing the willingness to spend on durable goods and discretionary consumption.

Regarding this weak trend, analyses from multiple institutions point out that "lack of confidence" remains the core issue. Views from ING and other investment banks suggest that China is currently facing not just a simple cyclical slowdown, but structural deflationary pressures similar to "Japanification." Despite strong manufacturing capacity, limited domestic absorption capacity has caused the Producer Price Index (PPI) to remain in deflationary territory for a long time, gradually transmitting to the consumer end, forming a "strong supply, weak demand" divergence.

Looking ahead, in the short term (1-2 months), affected by the timing of the 2026 Lunar New Year, CPI in January or February may see a seasonal rebound, but this should not be viewed as a signal of trend reversal. In the medium term (3-6 months), lacking strong fiscal transfer payments or structural reforms, the inflation level may remain at a low range below 1%. The market highly expects the People's Bank of China (PBOC) to take measures such as RRR cuts or interest rate cuts in the first half of 2026 to release liquidity and stabilize price expectations.

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