China Factory Deflation Eases — But Demand Still Weak

China’s producer price deflation softened in January, helped largely by a global metals rally, though economists warn that a sustained reflation remains elusive without stronger domestic demand.

Key Inflation Data (January 2026)

• Producer Price Index (PPI): -1.4% YoY

  • Smallest decline since July 2024

  • Improved from -2.1% previously

• Consumer Price Index (CPI): +0.2% YoY

  • Slowed from +0.8% in December

  • Core CPI: +0.8% (six-month low)

Headline improvement masks fragile underlying demand.

What’s Driving the PPI Rebound?

The improvement was concentrated in upstream sectors, particularly metals:

• Non-ferrous metal materials: +16.1% YoY

• Mining & processing prices: +22.7%

The rally in global commodities — especially gold and industrial metals — provided external support.

However, downstream consumer goods prices worsened, with declines widening to -1.7%, highlighting weak household demand.

Morgan Stanley economist Robin Xing noted that there is “no decisive reflation yet”, as higher commodity prices have not passed through to consumers.

Structural Headwinds Persist

China remains stuck in a prolonged deflation cycle:

• GDP deflator declined for a third consecutive year

• Weak property sector continues to drag confidence

• Industrial overcapacity fuels price wars (“anti-involution” campaign)

Authorities have begun clamping down on excessive discounting in sectors like food delivery and EVs to curb destructive competition.

Policy Outlook: Flexible But Cautious

The People's Bank of China signalled it will remain flexible with:

• Interest rate cuts

• Reserve requirement reductions

But easing may only accelerate if growth slows sharply or external shocks intensify.

Economists expect CPI to rise just 0.7% in 2026, well below the government’s 2% target — one of the lowest inflation rates globally.

Market Takeaway

• Metals rally temporarily cushions factory prices

• Consumer-side demand remains soft

• Reflation likely delayed until mid-2026 at earliest

• Policy easing remains on the table, but not urgent

China’s deflation story is easing — but not ending.

Bottom Line

January’s data offers a glimmer of stabilisation in factory prices, yet the broader economy remains under demand pressure.

Without a strong consumer rebound, China’s reflation will depend heavily on:

• Policy support

• Housing stabilisation

• AI and electronics demand momentum

For now, the deflation tunnel shows faint light — but not daylight yet.