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ING’s Chief Economist for Greater China, Lynn Song, notes that China’s CPI inflation eased to 1.0% year-on-year after Lunar New Year, while PPI turned positive for the first time since 2022. The report highlights rising energy and transportation fuel costs, suggesting further upside for inflation and a gradual shift away from entrenched deflationary expectations in China.
Energy-driven price pressures support reflation
“The substantive price drops are in line with China’s typical seasonality around the Lunar New Year holiday. More importantly for the months ahead, we are starting to see the impact of higher energy prices in the data. The subcategory for transportation fuel costs surged 10.0% MoM in March, even as gasoline prices have risen much less than crude oil prices in China. This surge culminated in a YoY spike to 3.4%, after coming in at -9.7% YoY in the first two months of the year. Further upside looks likely as energy prices stay elevated.”
“Producer price index inflation bounced back solidly into positive territory in March, ending a 41-month streak of deflation. PPI inflation rose to 0.5% YoY in March, slightly higher than market expectations and slightly lower than our forecast.”
“As we’ve discussed in recent months’ updates, the other key categories driving PPI recovery are non-ferrous metals mining (36.4%) and smelting and processing (22.4%), which continued to see PPI move higher on the month. Higher producer prices should eventually translate to reflationary momentum across the economy, which could help in the efforts to crack down on involution-type price competition.”
“China has been locked in deflationary expectations for the past several years, with CPI inflation ending the last 3 years at 0.2% YoY or lower.”
“All these factors could be at risk for reversal this year.”
