China’s CPI inflation slowed in January amid Lunar New Year effect

CPI inflation fell to 0.2% YoY in January, down from 0.8% YoY, coming in lower than market forecasts.

The main culprit for this decline was food prices, which fell -0.7% YoY, down sharply from 1.1% YoY in December. This directionality was well expected, as the Lunar New Year fell in late January for 2025, while it is mid-February for 2026; households tend to ramp up food purchases for celebrations during but especially at the start of the Lunar New Year holidays, which usually coincides with a price increase for food prices. This effect will likely reverse in February's inflation data, and overall we are still expecting food inflation to be higher in 2026 versus 2025. In terms of the food products causing the biggest drag in January, we had pork (-13.7%), eggs (-9.2%), and alcohol (-1.8%).

Non-food inflation also slowed a little more than expected, however, down to 0.4% YoY from 0.8% YoY. This marked a six-month low for non-food inflation. The picture for non-food prices was quite mixed. On the one hand, certain categories were in negative territory such as transportation and communication (-3.4%), travel and tourism services (-6.6%), as well as rents (-0.4%). Other categories saw relatively noticeable pickups in inflation, such as household appliances (6.6%), communication appliances (1.3%) tied to the trade-in policy impact.

Overall, CPI inflation continued to rise at a decent 0.2% month-on-month pace, suggesting that overall we are still on track to see a general recovery of inflation in 2026 for now. We hold our full year CPI inflation forecast at 0.9% YoY, with the key risks to the forecast being how policy rolls out domestically, and international price developments.

PPI inflation, on the other hand, continued its recovery trend, as hinted at by the PMI data earlier this month, rising to -1.4% YoY, up from -1.9% YoY. This is thanks to a 0.4% MoM uptick of PPI inflation, the highest sequential PPI move since September 2023. We had a substantive uptick in PPI inflation for non-ferrous metals input prices (16.1%), which was the main driving force for PPI moving higher, and this was also reflected in the ex-factory prices for the non-ferrous metals mining industry (22.7%) and non-ferrous metal smelting and rolling industry (17.1%). Most of the other categories remain quite soft for now.

When we get the 2026 economic targets at the Two Sessions in March, we're likely to see an inflation target of around 2% YoY, unchanged from 2025's goal. CPI inflation has fallen short of target for the past few years, and historically the target had been to limit the upside for inflation rather than the downside.

As such, even though we are forecasting CPI inflation to come comfortably short of the 2% target this year, it is not likely to substantively affect the People's Bank of China's decision-making. This will likely be more in consideration of the broader macro trends, as well as considering the potential impact on banks and markets as a whole. Given the soft domestic indicators over the past few months, we still think there is a solid case for further easing this year, and expect there will be room for the first move in 1H26, likely to start off with a 10bp rate cut and a 50bp Reserve Requirement Ratio cut.