China's Inflation Hits 5-Month High, Consumer Confidence Remains Weak

China’s Consumer Inflation Accelerates in January

China’s Consumer Price Index (CPI) rose by 0.5% in January, marking its fastest pace in five months and slightly exceeding market expectations. The increase was largely seasonal, as the Lunar New Year fell in January instead of February.

• Airfare prices surged 88.9%
• Tourism inflation rose 7%
• Movie ticket prices climbed 11%

Despite this surge in travel and entertainment costs, overall per capita consumption during the holiday season increased by just 1.2%, a dramatic decline from the 99.4% growth seen in 2024, underscoring weak consumer confidence.

Factory Prices Stuck in Deflation, Manufacturing Contracts

While consumer inflation saw a temporary boost, China’s Producer Price Index (PPI) fell 2.3% year-on-year in January, marking the 28th consecutive month of decline.

• Overcapacity in industrial goods
• Weak global demand
• Contraction in China’s manufacturing sector
• Softening in services activity

These factors indicate that China’s domestic demand remains weak, with the economy still struggling to recover amid a prolonged property downturn and rising local government debt.

External Risks and Policy Outlook

Adding to the uncertainty, Donald Trump’s proposed tariffs on Chinese goods could further strain exports—one of China’s key growth drivers.

Despite these challenges, Beijing is expected to maintain its 5% growth target for 2025. However, policymakers are unlikely to introduce any major fiscal or monetary stimulus before China’s annual Parliament session in March.

China’s provincial growth targets for 2025 suggest inflation expectations will remain below 3%, indicating that authorities are cautious about price stability and economic momentum.

China’s Economic Outlook: Cautious Recovery Amid Rising Risks

With weak domestic demand, persistent deflation in factory prices, and external trade risks, China’s economic recovery remains fragile. Policymakers face a balancing act between stimulating growth and maintaining financial stability, as global uncertainties continue to weigh on Asia’s largest economy.

Will China introduce stronger policy measures to boost demand, or will external risks derail its recovery? The coming months will be critical in shaping the country’s economic trajectory.

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