CITIC Securities: The timing of PPI turning positive year-on-year may be brought forward further

CITIC Securities Research Report states that in February, China’s PPI and CPI both exceeded market expectations, with both figures surpassing Wind’s consensus forecast by 0.3 and 0.4 percentage points, respectively. Regarding PPI, the core drivers of its outperformance are input factors from strong rises in non-ferrous metals and crude oil prices, with chemical and electronic prices also performing well. It is estimated that in February, contributions from non-ferrous smelting, chemicals, computer communications, and oil extraction to the month-on-month PPI increase were 0.32, 0.08, 0.08, and 0.04 percentage points, respectively. For CPI, aside from the “Spring Festival offset” factor, the main drivers include rising service prices (air tickets, car rentals, travel agencies, hotel stays), as well as increases in crude oil and gold prices. Under current geopolitical fluctuations between the U.S. and Iran, crude oil prices may continue to rise. It is estimated that a 1% increase in Brent crude oil prices could impact China’s PPI by about 0.04–0.05 percentage points and CPI by 0.01–0.02 percentage points, potentially further advancing the timing of year-on-year PPI turning positive. Regarding monetary policy, it is expected that the People’s Bank of China will not tighten monetary policy due to supply shocks in oil prices; instead, the focus will be on observing demand-side changes.

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Price Data | PPI Turning Positive Year-on-Year May Further Advance (February 2026)

In February, China’s PPI and CPI both exceeded market expectations, with the former surpassing Wind’s consensus forecast by 0.3 percentage points and the latter by 0.4 percentage points. The PPI’s outperformance was mainly driven by input factors from strong rises in non-ferrous metals and crude oil prices, with chemical and electronic prices also performing well. We estimate that in February, contributions from non-ferrous smelting and rolling, chemical raw materials and chemical products manufacturing, computer communication and electronic equipment manufacturing, oil and natural gas extraction, and non-ferrous mineral mining contributed 0.32, 0.08, 0.08, 0.04, and 0.02 percentage points to the PPI month-on-month increase, respectively (overall PPI month-on-month was +0.4%). The black material industry segment showed relatively flat factory prices, with coal mining and washing, ferrous metal mining, non-metal mineral mining, and non-metal mineral products recording month-on-month declines of -0.5%, -0.8%, -0.6%, and -0.2%.

In February, the CPI also significantly exceeded market expectations, aside from the “Spring Festival offset” factor, driven by rising service prices (air tickets, car rentals, travel agencies, hotel stays) and increases in crude oil and gold prices. The CPI year-on-year rose from 0.2% in January to 1.3% in February, surpassing Wind’s consensus forecast by 0.4 percentage points. The sharp rebound in February’s CPI includes the impact of the higher “Spring Festival offset” effect (2026’s Spring Festival falls in February, 2025’s in January). Additionally, four key sub-components are noteworthy:

1. Service CPI rose more than expected. In February, service CPI increased by 1.1% month-on-month, higher than the historical average for the same month (February of years with Spring Festival) by 0.4 percentage points. Tourism was the standout, with airline tickets, transportation rentals, travel agency fees, and hotel prices rising by 31.1%, 24.7%, 15.8%, and 7.3%, respectively, collectively contributing about 0.32 percentage points to the CPI month-on-month increase, accounting for over 30% of the total CPI rise.

2. Crude oil prices rose more than expected. In February, energy prices for transportation increased by 2.8% month-on-month, likely to sustain strong growth momentum as oil prices continue to climb.

3. Gold prices contributed significantly. In February, prices of other goods and services increased by 2.3% month-on-month, with a year-on-year increase of 15.4%, providing strong upward momentum to CPI.

Under current geopolitical tensions between the U.S. and Iran, crude oil prices may continue to rise, likely driving China’s PPI year-on-year to turn positive earlier than March. As of March 9, Brent crude spot prices have risen from $71.4 per barrel in February to $85.4 per barrel, with potential to hit $100 under current developments. Similar extreme shocks in oil prices impacted domestic prices during the Russia-Ukraine conflict in 2022, when Brent prices rose from $74.1 to $87.4, $98.3, and $119.0 per barrel from December 2021 to March 2022, with monthly increases of 17.9%, 12.6%, and 21.0%. Driven by this, China’s PPI increased by +0.5%, +1.1%, and +0.6% in February-April 2022.

Based on historical data estimates, a 1% increase in oil prices (Brent benchmark) could impact China’s PPI by about 0.04–0.05 percentage points and CPI by 0.01–0.02 percentage points. Under this scenario, the March PPI month-on-month increase may further expand, potentially leading to an earlier positive year-on-year PPI.

Regarding monetary policy, it is expected that the People’s Bank of China will not tighten monetary policy due to supply shocks in oil prices; instead, the focus will be on demand-side changes. For example, in 2021, despite a sharp rise in PPI driven by coal shortages and other supply-side factors, China’s monetary policy remained accommodative, with no tightening, as economic growth momentum weakened.

Bond Market Strategy:

For the bond market, the impact of rising inflation may differ in the short and long term. In the short term, the PPI’s unexpected improvement driven by rising oil prices could temporarily push long-term interest rates above 1.8%. In the longer term, under weak domestic demand, the pass-through of upstream price increases to downstream may be limited. If the year-on-year CPI increase remains modest, maintaining a low-cost financing environment through loose monetary policy remains feasible, and long-term risks in the bond market could be manageable. Thus, while short-term risks exist, the long-term outlook may be characterized by range-bound stability.

Risk Factors:

• Greater-than-expected U.S.-China trade tensions and worsening external environment for China’s economic development.
• Domestic and foreign demand recovery falling short of expectations.
• Unexpectedly aggressive Federal Reserve monetary policy.
• Greater-than-expected geopolitical risks.

(Source: People’s Financial News)