Key Takeaways:

• China's consumer price index (CPI) rose by 0.5% year-on-year in January, the highest increase in five months.
• Producer price index (PPI) maintained a decline of 2.3% for the 28th consecutive month.
• Mixed consumer spending during the Lunar New Year highlights ongoing concerns about domestic demand and economic recovery.

China's consumer inflation accelerated to a 5-month high in January, with the consumer price index (CPI) rising by 0.5% year-on-year, following a modest increase of 0.1% in December. This growth is in line with Reuters' estimates, however, there are lingering deflationary pressures on the horizon. The National Bureau of Statistics (NBS) indicated that while consumer prices reflect seasonal boosts attributed to the Lunar New Year holiday, underlying problems persist, with many analysts expressing concern over the sluggish domestic economic recovery due to external factors like renewed tariffs from U.S. President Donald Trump.

The core inflation rate, which excludes food and energy prices, rose to 0.6%, demonstrating a slight uptick from the 0.4% recorded in December, according to data reported by Channel News Asia. Consumer spending showed a mixed picture during the New Year celebrations, where spending on entertainment and travel increased, yet overall per capita holiday spending rose minimally by only 1.2%, highlighting ongoing concerns regarding consumer confidence and job security. This contrasts sharply with the 9.4% increase seen in the previous year.

Conversely, the producer price index (PPI) saw a consistent decrease of 2.3%, maintaining its deflationary streak for nearly two and a half years. Such persistent decreases signal challenges in the manufacturing sector, calling for governmental interventions to stimulate growth amidst ongoing sluggishness in demand. According to SCMP, the CPI targets have been lowered by many provinces to about 2% for 2025, down from the typical benchmark of 3%.

As the Chinese government prepares for its annual parliamentary session in March, experts like Zhiwei Zhang from Pinpoint Asset Management suggest that external uncertainties are overshadowing domestic economic issues, making it unlikely that significant monetary or fiscal policy shifts will occur soon. Without renewed efforts to boost domestic demand, analysts warn that deflationary trends could persist throughout the year, complicating China's recovery efforts from earlier economic downturns. For further details, see Reuters and SCMP.