Zhu Tian: With consumer prices returning to positive territory and profits seeing explosive growth, have we truly shaken off deflationary pressures?
In recent years, the Chinese economy has continued to face the pressures of sluggish prices, weak domestic demand and in-depth adjustment of the real estate sector, making "deflation" a high-frequency term in macroeconomic discussions. Entering 2026, the price index has turned positive from negative in the first three quarters, and the profits of industrial enterprises have rebounded significantly, rekindling market discussions on whether the economy has hit the bottom and whether deflation has ended. Does the positive turn of price index mean that deflationary pressure has truly eased? Can the rebound of data prove that the economy has got out of the woods? In this article, Zhu Tian, Professor of Economics at China Europe International Business School, provides a detailed analysis.
According to the data for the first three quarters released by the National Bureau of Statistics on October 19, GDP grew by 4.6%. This is the real growth rate after excluding the factor of price increase. Calculated based on the total current price, the nominal GDP in the first three quarters increased by about 5.5% year on year, about 0.9 percentage points higher than the real growth rate. This is an important change, because it indicates that the GDP deflator, which reflects the overall price level, has risen by about 0.9% year on year. In the past three years from 2023 to 2025, the GDP deflator has declined for three consecutive years and finally turned positive now.
This change actually started in the second quarter of this year, and the trend continued in the third quarter. Other price indices also show a rebound trend compared with the previous three years. The consumer price index (CPI) rose by 0.9% year on year in the first three quarters, while the average increase in the three years from 2023 to 2025 was only about 0.1%. After 41 consecutive months of year-on-year decline, the producer price index for industrial products (PPI) turned to a year-on-year increase in March this year. Since then, the increase has gradually expanded, reaching 5.0% in September, a new high in four years. The producer price index for industrial products rose by 2.3% year on year cumulatively in the first three quarters.
At the same time, the profit data of industrial enterprises also looks very impressive. From January to August this year, the total profit of industrial enterprises above designated size increased by 15.7% year on year. Previously, the profits of industrial enterprises declined for three consecutive years from 2022 to 2024, with declines of 4.0%, 2.3% and 3.3% respectively. It did not start to rebound slightly until 2025, with an annual growth of 0.6%. Since the beginning of this year, the profit growth rate of industrial enterprises has accelerated significantly.
Looking at these data alone, we will naturally ask: Has China finally got rid of deflationary pressure? Has the economy bottomed out and rebounded?
From the perspective of price indices, it can be said that deflation has ended. However, the rebound in prices has different reasons and completely different implications: the price rebound driven by demand means that the economy is improving; while the price rebound caused by supply shocks may make the economic situation more difficult. To judge whether the economy is really improving, we need to understand what factors have driven the rebound in prices.
The rebound of price indices does not equal the recovery of demand
First look at consumer demand. The total retail sales of consumer goods in the first three quarters only increased by 1.1%, and the nominal per capita consumption expenditure of national residents increased by 3.6%, lower than the 5.3% growth of per capita disposable income. Consumption growth is slower than income growth, indicating that residents still tend to increase savings and spend cautiously.
Then look at investment demand. The national fixed asset investment in the first three quarters decreased by 7.2% year on year, of which real estate development investment decreased by 20.6%, and manufacturing investment decreased by 2.1%, the declines continued to expand compared with the first half of the year.
In terms of external demand, exports grew by 16.4% in the first three quarters, which is very strong; but imports grew by 22.3%, faster than exports. After subtracting imports from exports, the goods trade surplus (the main part of net exports) is about 6.46 trillion yuan. Although the total amount is very high, it is only about 200 billion yuan more than the same period last year. The rapid growth of import value is largely driven by procurement related to the computing power industry chain and the rise in international commodity prices, which does not indicate a general recovery of domestic demand.
Therefore, from the demand data of consumption, investment and import and export, external demand remains strong, but consumption grows slowly and fixed asset investment continues to decline, indicating that domestic demand is still weak. So why are prices rising under the condition of weak domestic demand?
The price increase comes from upstream and international markets
The answer lies in the structure of prices. In September, the producer price index for industrial products rose by 5.0% year on year, the price of means of production rose by 6.5%, of which the mining industry rose by 25.4%, the raw material industry rose by 9.4%, the processing industry rose by only 3.4%, while the price of means of livelihood directly facing residents decreased by 0.1%. By industry, coal mining rose by 35.3%, oil and gas extraction rose by 24.5%, non-ferrous metal smelting rose by 21.4%, and computer, communication and other electronic equipment rose by 5.8%; but the ex-factory prices of automobiles, pharmaceuticals, alcohol and beverages decreased by 2.0%, 3.3% and 5.3% respectively. The situation of the consumer price index is similar: in September, energy prices rose by 7.3%, gold jewelry rose by 22.5%, and mobile phones rose by 14.9%; but food prices decreased by 1.7%, and service prices, which can better reflect domestic demand, rose by only 0.8%.
These data show that the rebound of the price index this year largely comes from the rise in international commodity and electronic product prices, rather than the general recovery of domestic terminal demand. China is a net importer of commodities and chips, and the rise in international prices means that China needs to pay higher import costs. Although some domestic upstream enterprises have benefited from this, the cost pressure on midstream and downstream enterprises has also increased accordingly. In the context of weak domestic demand, this cost shock may have a negative impact on the overall economy.
Profits are concentrated in a few industries
The high growth of industrial profits, in addition to the impact of the low base, it is more noteworthy that the growth is highly concentrated in a few industries. There are two main sources of profit growth: First, the electronics industry benefits from global computing power demand, with both sales volume and price rising; second, the prices of upstream raw materials rise.
Calculated based on the total profit and comparable growth rate published by the National Bureau of Statistics, the profit of industrial enterprises above designated size from January to August this year increased by about 710 billion yuan compared with the same period last year, of which the electronics industry increased by about 440 billion yuan. Adding the five upstream industries of non-ferrous metal smelting, coal mining, chemical raw materials, oil and gas extraction and petroleum processing, the six industries have increased by a total of about 950 billion yuan, exceeding the total increase in all industrial profits. In other words, the total profits of other industrial industries have decreased by about 7%, of which the profit of automobile manufacturing industry decreased by 16.0%, that of electrical machinery decreased by 5.2%, that of non-metallic mineral products decreased by 46.7%, that of agricultural and sideline food processing decreased by 17.4%, and that of textile and clothing decreased by 14.4%.
The logic is very simple. The prices of upstream raw materials and chips rise, and the costs of midstream and downstream enterprises rise accordingly. However, due to weak demand, prices cannot rise, so profits are squeezed from both sides. The price data also reflects this pressure. In the first three quarters, the producer purchase prices of industrial products rose by 3.6% on average year on year, while the ex-factory prices only rose by 2.3%. The rebound of ex-factory prices is mainly concentrated in the upstream: the mining industry and raw material industry rose by 9.7% and 4.9% respectively, the processing industry rose by only 1.9%, and the price of means of livelihood directly facing residents decreased by 1.0% instead. Buying at a higher price but unable to sell at a good price is exactly the portrayal of the squeezed profits of midstream and downstream enterprises.
It is precisely these midstream and downstream manufacturing enterprises and service industries that provide a large number of jobs. The improvement of profits concentrated in a few industries is not enough to drive the general improvement of employment and residents' income, so it is difficult for consumption to really pick up.
Demand policies still need to be strengthened
At present, the situation of insufficient aggregate demand remains severe. Real estate investment is still declining at a rate of 20%, consumption growth is weak, private investment and manufacturing investment are both shrinking, and the gap in domestic demand may still be expanding.
Therefore, the intensity of demand-side policies should not only not be reduced, but should also be increased, focusing on consumption and real estate. In terms of consumption, the central finance can issue national bonds to directly distribute cash consumption vouchers to residents, and continue to implement the policy before domestic demand really drives prices and economic growth back to the target level. In terms of real estate, the central government invests funds to purchase existing housing at a discount, convert it into indemnificatory rental housing, improve the cash flow of real estate enterprises, ensure housing delivery, digest inventory, and also show the market the determination to stabilize the real estate sector, so as to stop the decline of this largest source of demand contraction first. Most importantly, these policies need to be large enough to truly fill the huge gap in aggregate demand.
Back to the question in the title, from the perspective of price indices, deflation has ended, but from the perspective of demand, the gap is still large, and the economy has not recovered due to the rebound in prices. In this sense, we have not got rid of deflationary pressure, and there is much room for demand policies to play a role.
Professor Introduction
Zhu Tian is Professor of Economics, Santander Chair in Economics, and Vice President and Chinese Dean at China Europe International Business School. He joined CEIBS in 2005, after ten years of teaching at the Hong Kong University of Science and Technology. Over the past decade, Professor Zhu has focused on studying the Chinese economy from a global comparative perspective. He is the author of *The China Growth Puzzle*, *Chinese-style Growth* and *The Logic of Catching Up: Culture, Institutions and China's Rise*, and often publishes economic commentaries in various media and WeChat official accounts.
This article comes from the WeChat official account "China Europe International Business School" (ID: CEIBS6688), the author is Zhu Tian, and 36Kr is published with authorization.