China’s consumer inflation accelerated in January, reaching its highest level in five months, driven by a surge in household spending during the Lunar New Year holiday.
The consumer price index (CPI) rose 0.5% year-on-year, up from December’s 0.1% increase, surpassing economists' median forecast of 0.4%. However, deflationary pressures remain, particularly in factory prices, which have been in decline for 28 consecutive months.
The rise in CPI was largely fueled by increased food prices and tourism-related services. Service prices climbed 0.9%, contributing over half of the overall CPI increase. Prices for airline tickets rose 8.9%, tourism inflation hit 7.0%, and movie and performance tickets surged 11.0% compared to the previous year. While consumers spent more on entertainment, shopping, and dining, overall per capita spending during the holidays grew by just 1.2%, a sharp slowdown from the 9.4% rise in 2024.
Despite the temporary boost from seasonal demand, analysts predict inflation will ease in February. The timing of the Lunar New Year, which fell earlier this year, skewed January’s data. Core inflation, which excludes food and fuel, also rose to 0.6% from 0.4% in December.
Meanwhile, China's producer price index (PPI) fell 2.3% after a similar drop in December, indicating continued industrial overcapacity and weak factory activity. Analysts suggest it may take several quarters for China to emerge from deflation, as persistent price drops could suppress household spending and corporate earnings, potentially leading to job losses and lower investments.
To counter economic headwinds, Chinese authorities, led by President Xi Jinping, have prioritized stimulating domestic consumption and increasing government spending. However, with additional tariffs from the U.S. raising concerns over exports, policymakers face mounting pressure to stabilize economic growth. Many expect no major fiscal or monetary policy changes before the annual parliamentary session in March. While Beijing is likely to maintain its economic growth target of around 5% for 2025, ongoing deflationary trends and global trade uncertainties pose significant challenges for sustaining long-term recovery.