By Jing Ye
The numbers Beijing cannot talk away
Start with China’s own official figures.
In October 2025, China’s Consumer Price Index (CPI) rose just 0.2 percent year-on-year, while the national average CPI for January through October fell 0.1 percent compared with the same period the year before. In the same month, the Producer Price Index (PPI) dropped 2.1 percent year-on-year.
In November 2025, CPI rose 0.7 percent, but the January–November average CPI stood at only 0.2 percent, unchanged from a year earlier. PPI remained firmly negative, down 2.0 percent.
By December 2025, CPI increased 0.8 percent year-on-year, the highest reading since March 2023. Yet the full-year average CPI for 2025 still rose only 0.2 percent, exactly matching the previous two years. Meanwhile, December PPI fell 1.9 percent, marking the 40th consecutive month of negative producer-price growth. For the full year, PPI declined 2.6 percent.
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These are not isolated fluctuations. They describe a pattern.
The question is no longer whether China might face deflation. The question is whether it is already there—and how long it will last.
What deflation really means—and why governments fear it
Deflation is often misunderstood as a benign phenomenon: prices fall, purchasing power rises, consumers benefit. History shows the opposite.
From the Great Depression in the United States, to Japan’s post-bubble stagnation, to the Eurozone debt crisis, deflation has consistently coincided with collapsing demand, shrinking employment, and prolonged social stress. Falling prices are not the cause; they are the symptom of an economy that has seized up.
To assess China’s position, it is necessary to understand how deflation is identified—and why it is so difficult to reverse once entrenched.
The two indicators that matter: CPI and PPI
China’s official CPI growth target for 2025 was 2 percent. The actual outcome—0.2 percent—represents a decisive miss.
CPI measures consumer demand. Short-term declines may reflect seasonal effects or sectoral adjustments. But when CPI growth hovers near zero or turns negative for extended periods, it signals broad weakness in household consumption.
PPI is even more revealing. It reflects prices at the factory gate and directly tracks corporate profitability. Sustained negative PPI means firms cannot pass on costs or sell goods at profitable prices. Investment slows, hiring freezes follow, and layoffs become inevitable.
Since September 2022, China’s PPI has been negative for 40 straight months. CPI deflation is no longer hypothetical—it is forming in plain sight.
By standard economic definitions, China has entered a deflationary phase.
Three deflationary precedents—and their lessons
Modern economic history offers three clear precedents.
Between 1929 and 1939, U.S. CPI fluctuated between –5 percent and –10 percent, marking the deepest deflation of the modern era.
The 1920s had been an age of leverage and speculation. From 1921 to 1929, the Dow Jones Industrial Average surged from 60 to 380 points—an increase of more than 600 percent. Easy credit fueled mass participation in the stock market. Banks routinely lent at 10-to-1 leverage.
By 1929, valuations had become absurd. Average price-to-earnings ratios approached 30, with many stocks trading far higher. When the crash came in October 1929, it erased $40 billion in market value in a single week—roughly half of U.S. GDP at the time.
What followed was systemic collapse. Businesses failed by the hundreds of thousands. Industrial output halved. Unemployment rose from 3.2 percent to 25 percent.
Deflation made prices cheaper, but money stopped moving. Consumption froze, investment vanished, and layoffs reinforced the downward spiral. Only the massive industrial mobilization of World War II—not conventional policy—ultimately pulled the U.S. out of deflation.
Japan’s experience was different in speed, but not in outcome.
By the late 1980s, Japan was at the peak of an asset bubble. The Nikkei 225 reached nearly 39,000 points in 1989. Tokyo real estate prices became a global punchline for excess.
When the Bank of Japan raised interest rates to puncture the bubble, the collapse was swift. By 1990, the Nikkei had fallen to 15,000. Property prices in major cities declined 50 to 70 percent.
From 1990 to 2020, Japan’s CPI oscillated between 0 and –2 percent. Wages stagnated. Consumption weakened. Households prioritized savings over spending. Despite zero interest rates and repeated rounds of quantitative easing, deflation persisted.
Japan’s lesson is stark: once asset bubbles burst and confidence collapses, policy tools lose their force. Deflation becomes a self-reinforcing equilibrium.
The third case emerged after the 2008 global financial crisis.
High-debt Eurozone countries—Greece, Spain, Italy, Portugal—were hit hardest. Greece’s 2010 admission that it had falsified fiscal data shattered investor confidence. Bailouts from the European Central Bank (ECB) and the International Monetary Fund (IMF) came with strict austerity requirements.
Governments slashed spending, froze wages, and cut pensions. The result was predictable. From 2010 to 2015, Eurozone CPI ranged between –1 percent and –0.5 percent. Unemployment soared above 20 percent in Greece and Spain, with youth unemployment exceeding 40 percent.
Only after the ECB embraced quantitative easing and Germany increased investment did Europe slowly stabilize.
China today: profits vanish, losses multiply
China now exhibits the same underlying dynamics.
CPI growth is barely positive. PPI has been deeply negative for years. Corporate profitability is deteriorating rapidly.
By December 2024, China recorded 116,428 loss-making industrial enterprises, accounting for more than 22 percent of the total—roughly one in five firms. This represented a 9.2 percent increase from the year before.
Total industrial profits fell to 7.43 trillion yuan, down 3.3 percent year-on-year. Losses among unprofitable firms expanded to 1.81 trillion yuan, with both the number of loss-making companies and the magnitude of losses rising simultaneously.
This is the anatomy of deflation: shrinking profits lead to reduced investment, which suppresses employment, erodes income, and ultimately crushes consumption.
When deflation becomes personal
Many Chinese households already feel the shift.
Prices may appear stable, but incomes are not. Job insecurity is rising. Consumption is falling—not because people lack desire, but because purchasing power is quietly eroding.
These are not abstract indicators. They are early-warning signals.
History shows that deflation does not merely reshape balance sheets; it reshapes lives—determining whether people can secure stable work, afford housing, or maintain basic economic dignity.