ING’s Chief Economist for Greater China, Lynn Song, notes that China’s CPI inflation declined to 1.0% year-on-year after Lunar New Year, while PPI turned positive for the first time since 2022. The report highlighted rising energy and transportation fuel costs, suggesting a further rise in inflation and a gradual shift away from entrenched deflationary expectations in China.

Energy-driven price pressures favor reflation

“The significant price declines are consistent with China’s typical Lunar New Year seasonality. More importantly, we are starting to see the impact of higher energy prices in the coming months in the data. The transportation fuel cost subcategory increased by 10.0% m/m in March, even though gasoline prices rose much less than crude oil prices in China. This growth ended with a y/y increase to 3.4%, after reaching -9.7% y/y in March. Further growth is likely in the first two months of the year as energy prices remain at a high level.”

“Producer price index inflation rebounded to positive territory in March, ending a 41-month streak of deflation. PPI inflation rose to 0.5% y/y in March, slightly above market expectations and slightly below our forecast.”

“As we have discussed in recent months’ updates, other key categories driving the PPI rebound are non-ferrous mining (36.4%) and smelting and processing (22.4%), where PPI continued to rise this month. Higher producer prices should ultimately translate into reflationary dynamics across the economy, which could aid efforts to quell involutionary price competition.”

“China has been stuck in deflationary expectations for several years, with CPI inflation for the past 3 years being 0.2% y/y or less.”

“All of these factors could be at risk of turning around this year.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)