China Seen Exiting Deflation Cycle Sooner Than Expected
China could emerge from its prolonged deflation phase earlier than markets anticipate, according to analysts at ANZ. The bank expects a return to positive price indicators, although the recovery process may bring new economic challenges.
Key Inflation Metrics Set to Turn Positive
ANZ forecasts that China’s main inflation gauges—including the producer price index (PPI), consumer price index (CPI), and GDP deflator—will shift into positive territory on a year-on-year basis in the first quarter of 2026.
The GDP deflator, in particular, is projected to rise by around 0.5%, marking its first expansion in three years and signaling a potential turning point for the economy.
Rising Energy Costs Driving “Bad” Inflation
The expected rebound in inflation is largely attributed to imported pressures, especially from higher global energy prices. ANZ describes this as “bad” inflation, as it could put additional strain on already fragile consumer demand and corporate profitability.
Higher input costs may weigh on industrial output and limit household spending power, creating mixed effects across the economy.
Why Inflation Still Beats Deflation
Despite these concerns, ANZ argues that inflation—even if driven by external factors—is still preferable to deflation. China’s deflationary environment has been fueled by a persistent imbalance between supply and demand.
According to the bank, policymakers have more effective tools to manage rising costs than to stimulate demand in a weak consumption environment.
Limited Impact on Broader Economic Imbalances
While higher oil prices could support demand in certain sectors, such as renewable energy, they are unlikely to resolve China’s deeper structural issues. At the same time, elevated energy costs may continue to pressure household consumption.
Policy Tools to Manage Inflation Pressures
Chinese authorities are expected to deploy a range of measures to control inflation and stabilize the economy. These may include:
- Administrative price controls
- Strategic petroleum reserve adjustments
- Fiscal subsidies
- Diversification of energy imports
Supply-Side Reforms Remain Central
ANZ also highlighted that China will likely continue advancing supply-side reforms as part of its broader reflation strategy. These efforts aim to bring an end to the deflation cycle and support the development of a more unified national market.
