China consumer inflation hits fastest pace since February 2023, in line with expectations

• Monthly consumer prices grew 0.2%, exceeding the expected 0.1% gain, while producer prices have remained in deflation for over three years
• Economists forecast China's real GDP growth to slow to 4.5% in Q4 2024 from 4.8% in Q3, with annual consumer inflation expected to remain flat in 2025
• Industrial firm profits dropped 13.1% year-over-year in November, the steepest decline in over a year, as price wars and oversupply continue to hurt business profitability despite government intervention efforts

Summary: China Consumer Inflation Accelerates Amid Persistent Economic Weakness

Key Data Points:

China's consumer price index (CPI) rose 0.8% year-over-year in December 2024, the fastest pace since February 2023, meeting economist expectations. Monthly CPI increased 0.2%, exceeding the forecasted 0.1% gain. Core inflation remained steady at 1.2% annually, while factory-gate prices fell 1.9%, extending deflation beyond three years—better than the expected 2% decline.

Economic Outlook:

Despite China achieving its approximate 5% growth target for 2024, underlying demand remains weak. Macquarie forecasts flat consumer inflation in 2025 and producer price deflation of 2.7%, potentially marking the longest deflationary streak on record. Bank of America expects Q4 GDP growth to soften to 4.5% from 4.8% in Q3, with fixed-asset investment dropping approximately 11.8% year-over-year in December.

Structural Challenges:

Consumer spending remains subdued due to uncertain employment prospects and the prolonged property crisis eroding household wealth. Industrial profits plunged 13.1% year-over-year in November, the steepest decline in over a year, as intense price wars hurt business profitability.

Positive Indicators:

Manufacturing activity showed improvement, with the official PMI rising to 50.1 in December from 49.2, breaking an eight-month contraction streak.

Policy Response:

Communist Party leadership pledged stronger measures to stabilize real estate and boost consumption, though analysts remain skeptical. Expected actions include mortgage rate cuts and easing home purchase restrictions, but Macquarie warns these may not reverse declining trends, projecting new home sales to fall 7% in 2026 following an 8% drop in 2025.