The good news is, deflation in China eased last month.

The bad news (or the caveat, if you’d rather) is that it was a holiday distortion and probably won’t last.

Headline CPI showed a 0.2% increase for October, data released on Sunday in Beijing showed. That was “quicker” (“quick” is obviously a misnomer) than economists expected. In fact, consensus was looking for another decline following the prior month’s -0.3% YoY drop.

As the figure shows, the core gauge quickened to 1.2%, the fastest in nearly three years.

Don’t get too excited. Some that’s almost surely due to the Golden Week seasonal. If you’re the type who sees hope where there isn’t any, you could argue the October inflation figures constitute tentative evidence that the government’s efforts to revive domestic demand are bearing fruit, but I’d caution that we’ve heard some version of that story dozens of times over the past two years, and it’s never true.

China’s dealing with price wars in a lot of industries, which is to say there’s a race to the proverbial bottom in both products and services as consumers remain reluctant to borrow and spend. That’s why economists abhor deflation: It’s self-fulfilling. If you know prices are going to be lower “tomorrow” you won’t buy “today.” Businesses respond by lowering prices even further to spur sales, the competition responds, prices keep falling, consumers keeping putting off purchases and around we go to the detriment of the real growth impulse.

If you squint at the chart, you can see that PPI deflation moderated to -2.1% in October. That was the best (i.e., least negative) read since August of 2024, and the NBS suggested on Sunday that some industries are working through overcapacity. Note that industrial profits rose the most in nearly two years in September.

Still, it’s very hard to perceive a light at the end of this particular tunnel, and now export growth’s sputtering. Just about the last thing Xi Jinping needs with consumption still on shaky footing is a sudden drop-off in external demand.

Yes, the Party will say real growth met the 2025 target, but the figure below’s a (stark) reminder you hopefully don’t need.

The quarterly real growth prints — the GDP numbers that make headlines — are flattered by the deflator, which spent a 10th quarter in negative territory in Q3.

That’s the longest run of deflation ever in China, or at least the longest run in the era of modern data which dates to the early 1990s.

SocGen’s Albert Edwards put this in perspective. “If any G7 country had [that many] consecutive quarterly declines in their GDP deflator, it would be deemed a crisis, and the central bank would be printing money like confetti,” he said. “But it is a crisis because deflation in a highly indebted economy, such as China, is a toxic combination.”