China's inflation landscape is showing signs of change, according to ING’s Chief Economist for Greater China, Lynn Song. The Consumer Price Index (CPI) inflation eased to 1.0% year-on-year after the Lunar New Year, reflecting typical seasonal price drops. However, the Producer Price Index (PPI) turned positive for the first time since 2022, rising to 0.5% year-on-year in March, which was slightly above market expectations but below ING's forecast [1].
A key driver behind this shift is the surge in energy and transportation fuel costs. The transportation fuel subcategory jumped 10.0% month-on-month in March, leading to a year-on-year spike of 3.4%, a sharp turnaround from the -9.7% year-on-year figure recorded in the first two months of the year. This increase occurred despite gasoline prices rising less than crude oil prices in China, and ING suggests further upside is likely as energy prices remain elevated [1].
The recovery in PPI is also being propelled by non-ferrous metals mining and smelting and processing, which saw monthly increases of 36.4% and 22.4%, respectively. These higher producer prices are expected to eventually foster reflationary momentum across the broader economy, potentially aiding efforts to address involution-type price competition [1].
China has been entrenched in deflationary expectations for several years, with CPI inflation ending the last three years at 0.2% year-on-year or lower. ING notes that all these factors could be at risk for reversal this year, indicating a possible shift away from deflation and towards reflation [1].
CONCLUSION
China's inflation pressures are building, driven by rising energy and producer prices. The shift in CPI and PPI data suggests a potential reversal of entrenched deflationary expectations, with ING forecasting further upside if energy prices remain elevated. Market participants should monitor these trends for signs of broader economic reflation.