China's Inflation Hits Three-Year High
China’s consumer inflation hit its highest level in three years in February, with core CPI up 1.8% year-on-year. Producer price deflation also moderated, suggesting a gradual recovery in domestic demand. This trend is seen as a positive sign for the global supply chain and commodity exporters.
The jump to 1.3% annual inflation in February is the highest since January 2023, exceeding market expectations of 0.8%. This increase is largely attributed to the Lunar New Year, which occurred in mid-February this year. Food prices saw the sharpest increase since October 2024, driven by rising costs for fresh vegetables and a smaller drop in pork prices. Core inflation, excluding food and energy, rose 1.8% year-on-year, the highest since March 2019. Service prices also played a significant role, rising 1.6% in February, contributing approximately 0.75 percentage points to the overall CPI increase. Specifically, airline tickets, transportation rentals, travel agency fees, and hotel accommodations saw notable price increases. While CPI inflation saw an increase, the Producer Price Index (PPI) continued to decline, falling 0.9% year-on-year. However, this was a smaller decline than the 1.4% drop in January. This marks the 42nd consecutive month of PPI decline, influenced by sluggish local demand and high production capacity. Looking ahead, analysts at ANZ forecast a potential 25 basis point cut in China's required reserve ratio in response to the mixed inflation data. Goldman Sachs Research expects China's real GDP to grow by 4.8% in 2026. However, if Middle East conflicts persist and oil prices remain high, China's fuel price inflation could surge, potentially pushing headline inflation up by at least 1%.
