China's Inflation Hits 37-Month High Ahead Of Upcoming Oil Price Shock

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February CPI inflation hits a 37-month high on Lunar New Year effect

China’s consumer price index (CPI) inflation rose to 1.3% year-on-year in February, up from 0.2% in January, higher than consensus forecasts.

As expected, the Lunar New Year contributed to a spike in food inflation, which rose to 1.7% YoY, up from -0.7% in January. The usual holiday food categories saw notable month-on-month increases. We saw a 4.0% MoM spike in pork prices, while YoY inflation remained negative at -8.6%. Aquatic products surged 6.9% MoM to hit 6.1% YoY, while fresh fruit prices also rose 4.0% MoM to reach 5.9% YoY. After the Lunar New Year distortions pass, we continue to expect food inflation to remain in positive territory this year, driven by the turn in the pork price cycle.

The Lunar New Year also contributed to a spike in inflation for tourism and travel services, which rose 11.7% YoY. Miscellaneous services surged 15.4% YoY, as households continue to show solid demand for quality services.

Other categories also showed signs of moving out of deflation. Beyond residence (-0.2%) and transportation and communications (-0.7%), many categories were positive on the month. It’s likely we could see the transportation subcategory pick up in the coming months, with fresh measures to curb auto price wars and the spike in oil prices likely to bolster inflation.

At the Two Sessions, policymakers set a 2% CPI inflation target and vowed to "steer general price levels back into positive territory.” This is a firm commitment to ending deflation. As things stand, they won’t need to do much to achieve this.

Food inflation picked up in February on Lunar New Year effects PPI inflation continues to climb closer toward positive territory

Producer price index inflation rose to -0.9% YoY in February, a 19-month high. PPI inflation has seen positive MoM growth for the past 5 months. With the ongoing oil price surge in March, we could see it move into positive territory as early as next month’s report.

The purchasing managers’ index surveys have so far flagged a recovery in PPI inflation.

Similar to January, the highest PPI inflation in February was observed in the non-ferrous metals mining (30.2%) and smelting and processing (22.1%) industries. Crude oil and natural gas industries saw a 5.1% MoM uptick in February but remained in contraction at -12.9% YoY. With the price shocks in March, we should see further upside on this subcategory in next month’s report.

China should be successful in moving out of deflation in 2026 PBOC signals there is still room for monetary easing this year

At the Two Sessions, the People’s Bank of China (PBOC) signalled that this year would continue to feature moderately loose monetary policy, and that there was room for lower lending rates at a suitable time.

Our interpretation is that, while the urgency for monetary easing was not great, there’s still room for further rate cuts. Unless the oil price shock is notably stronger and longer than expected, inflation is unlikely to inhibit PBOC easing this year. We continue to see room for a rate cut in the second quarter as the economy likely got off to a soft start in 2026, though odds are rising for policymakers to choose a more cautious route and push this back, assuming energy disruptions persist, and global inflationary pressures pick up.

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