(Feb 11): China’s factory deflation eased more than expected in January thanks mostly to a global metals rally, even as weak demand at home restrains a more sustainable turnaround in prices.
The producer price index (PPI) fell 1.4% last month from a year earlier, their smallest decline since July 2024, according to data released by the National Bureau of Statistics (NBS) on Wednesday. Consumer inflation slowed for the first time since August because of base effects and grew just 0.2%, after a 0.8% rise in December.
“There’s no decisive reflation yet,” Robin Xing, an economist at Morgan Stanley, said in an interview with Bloomberg Television. While the PPI improved “a little”, he said that “it’s not a demand-led turn in China because we see no pass-through from the upstream commodity price to downstream consumer goods”.
Higher global prices for gold and other commodities are helping mask the extent of the deflationary strain in China. While most economists forecast a recovery in consumer and producer costs this year, downward pressure on prices will probably persist in the absence of a strong pickup in domestic demand.
China’s consumer prices will likely rise 0.7% this year from a year ago, based on the median estimate of economists polled by Bloomberg. That would be among the lowest inflation rates in the world and fall well short of the government’s non-binding target of 2%.
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The latest improvement in the PPI was largely a result of changes in upstream sectors like the processing and refining of metals. The decline in prices of producer goods — which reflects the performance of mining, raw materials and manufacturing — narrowed to 1.3% in January from 2.1% in December.
By contrast, the fall in consumer goods prices ranging from food to daily-use items widened to 1.7% from 1.3% in the same period.
Even so, after dropping for 40 straight months, the PPI reading “could be a positive signal for the market if we suddenly see the light at the end of the tunnel of these deflationary pressures on the production side of the economy”, Alicia Garcia Herrero, the chief economist for Asia-Pacific at Natixis SA, told Bloomberg Television before the data release.
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China remains in the grip of deflation that’s eating away at income and profits. The country’s gross domestic product deflator declined for the third straight year in 2025, the longest streak since China transitioned towards a market economy in the late 1970s.
The core consumer price index (CPI), which excludes volatile items such as food and energy, climbed 0.8%, its lowest level in six months.
NBS statistician Dong Lijuan attributed the slower increase in the CPI partly to the effect of a high base last year and said fluctuations in global oil prices contributed to a drop in domestic energy costs. The Lunar New Year, which tends to drive up spending by households, is a moving holiday that ran from Jan 28 to Feb 4 in 2025 but will fall entirely in February of this year.
Deflationary pressures have been present since the end of the pandemic, in large part as a consequence of a prolonged slump in housing and weak consumer demand.
A glut of production capacity in some industries has also led to oversupply, pushing firms to cut prices to survive. In response, the government has moved to curb cut-throat competition among companies — a campaign dubbed “anti-involution” — to stamp out the price wars that have been eroding corporate earnings in industries from electric vehicles to food delivery.
Authorities are making some headway in containing deflationary pressure. Major restaurant and beverage chains in China, including KFC and Cotti Coffee, are raising prices on food delivery platforms, retreating from years of discounting after regulators launched a probe into subsidies in the sector.
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Bloomberg Economics expects China’s economy to start to reflate as soon as in mid-2026, thanks to subsidies to spur consumption and policies to curb involution-style competition.
The inflation reading for the full calendar year of 2025 was zero, the lowest since 2009 and far below the official aim of around 2%.
In monthly terms, producer prices have been rising since October, their longest streak since early 2022. That reflects a combination of factors, including the global rally in metals prices, government efforts to curb competition, as well as increased demand in electronics related to artificial intelligence, the NBS’ Dong said in a statement.
Prices of non-ferrous metal materials surged 16.1% in January from a year ago, and the output price of non-ferrous metals mining and processing industry soared 22.7%.
The January figures are based on updated baskets of goods and services for the CPI and PPI. The NBS refreshes the composition of those indices every five years.
The latest revision for the CPI basket increased the weighting of dining out, transportation and communication, education and entertainment, health services as well as other goods and services. The share of clothing, housing and household services dropped, according to the NBS.
Chinese officials have signalled that maintaining a “reasonable recovery in prices” will continue to be a key consideration for monetary policy in 2026.
The People’s Bank of China (PBOC) reaffirmed a pledge to be flexible in its use of tools such as cuts to interest rates and reserve requirements for lenders, according to a report published late on Tuesday. Such reductions may only come when the economy slows significantly or when in case of shocks such as US tariffs or market sell-offs, Huaxi Securities analysts said in a report on Wednesday.
But the PBOC said there have been “positive changes” in prices, and that government efforts to lift consumption will further improve market confidence and support a rebound in inflation.
Lynn Song, the chief economist for Greater China at ING Bank NV, said in a report that inflation is “unlikely to have a major impact on PBOC monetary policy trajectory” even if it falls short of target again.
At the same time, “given the soft domestic indicators over the past few months, we still think there is a solid case for further easing this year”, he said.
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