China’s headline Consumer Price Index (CPI) rose to 0.2% year-on-year in October, up from -0.3% in September. Core CPI, excluding food and energy, also increased to 1.2% year-on-year, a 20-month high from September’s 1.0%.
Economic Trends
Services inflation rose to 0.8% year-on-year, while consumer goods price deflation narrowed to -0.2% year-on-year from -0.8% in September. Sequential monthly gains were 0.2%, up from September’s 0.1%, with services rebounding by 0.2% and food prices showing a rise of 0.3% month-on-month.
Food price deflation lessened to -2.9% year-on-year from September’s -4.4%. Although most key food products continued to decline, the pace of deflation slowed, for items like pork, eggs, fresh vegetables, fresh fruits, while prices for aquatic products increased by 2.0% year-on-year.
China’s Producer Price Index (PPI) deflation reduced for the third month in a row to -2.1% year-on-year in October, a slight improvement from September’s -2.3%, continuing a 37-month trend of year-on-year contraction.
Given today’s date of November 10, 2025, the latest inflation data from China offers a notable shift. We see the headline CPI has moved back into positive territory at 0.2% year-on-year, beating expectations and breaking a two-month deflationary streak. This suggests that the persistent fears of a deflationary spiral that dominated market sentiment through much of 2025 may be starting to ease.
Market Implications
The strength in core inflation, which hit a 20-month high of 1.2%, is particularly important for us. This indicates that underlying domestic demand, especially in services, is firming up, driven by recent holiday spending. This is not just a base effect; it signals some resilience in the Chinese consumer, which we have been waiting for.
For derivative traders, the narrowing PPI deflation to -2.1% is a key bullish signal for industrial commodities. Historically, a bottoming out of China’s factory-gate prices has preceded a recovery in demand for materials like copper and iron ore. With copper inventories on the Shanghai Futures Exchange recently reported to be at a seven-month low, we could see upward pressure on prices, making long positions in commodity futures or calls on related ETFs attractive.
This data should provide a floor for Chinese equities, which have been underperforming for most of the year. We can consider selling out-of-the-money puts on indices like the Hang Seng China Enterprises Index (HSCEI) or the CSI 300 to collect premium, betting that the worst of the economic news is behind us. The risk of a sharp downturn driven by deflation appears to be receding for now.
However, we must remain cautious as the property sector continues to be a drag, with new home sales in October still down 12% year-on-year, according to recent figures from the National Bureau of Statistics. While this is an improvement from the over 20% declines we saw earlier in 2025, it is not a recovery. This will likely cap any significant rally in the near term.
The improving economic picture should lend support to the yuan (CNH) and commodity-linked currencies. We have seen the Australian dollar, a common proxy for Chinese economic health, rally over 2% against the US dollar since the start of November. This trend could continue, making long AUD/USD positions a viable way to express a positive view on China’s stabilization.
Finally, with a key tail risk like deflation appearing less threatening, we could see implied volatility on Chinese equity options decrease in the coming weeks. For traders positioned for it, this could be an opportunity to profit from strategies that benefit from falling volatility. The VIX-equivalent for the Hang Seng Index, the VHSI, has already fallen from its October highs above 30 to around 24.
