China: Cost-driven reflation outlook – Standard Chartered

Standard Chartered economists argue that higher Oil and commodity prices are driving a cost‑push reflation process in China, with CPI inflation in 2026 now projected at 1.2% instead of 0.6%. They expect PPI deflation to end and the GDP deflator to turn positive, while the PBoC keeps policy accommodative but refrains from cutting rates further.

Higher commodities lift China inflation outlook

"With our in-house Brent oil forecast revised to USD 85.5/bbl for 2026, 35% higher than our forecast at end-2025, the pass-through to China’s inflation, especially PPI, appears non-negligible."

"Even before the recent oil rally, signs of reflation had already emerged, supported by rising metal prices in upstream sectors and domestic capacity management."

"Cost‑push inflation could further squeeze industrial profits if firms are unable to fully pass higher costs on to consumers."

"That said, positive inflation could still help unwind entrenched deflation expectations and, when combined with more active fiscal spending to lift demand, could contribute to more sustainable reflation."

"We raise our average CPI inflation forecast for 2026 to 1.2% from 0.6% previously, driven mainly by higher commodity prices, a stabilisation in food prices, and a modest firming in services prices."

"We now expect PPI inflation to average 0.8% in 2026, ending four years of deflation; risks remain two‑sided given uncertainty around global demand and commodity prices. The GDP deflator will likely turn positive this year. We do not expect a shift in the accommodative monetary policy stance in response to moderate reflation. However, we think the bar for policy rate cuts has increased and therefore no longer expect a policy rate cut in 2026."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)