The recent slowdown in China”s Consumer Price Index (CPI) has raised eyebrows, as highlighted by MUFG analysts Lin Li and Khang Sek Lee. They attribute this decline largely to the seasonal effects of the Chinese New Year, which has distorted the inflation landscape. The slowdown in CPI is primarily driven by weaknesses in food and services, which have significantly impacted the headline inflation figure.
Moreover, the Producer Price Index (PPI) deflation has shown signs of narrowing, thanks to rising global metals prices and increased demand for technology-related products. This indicates a potential shift in the economic environment, yet the overall reflation process is anticipated to be gradual despite the government”s ongoing anti-involution measures.
Looking forward, MUFG suggests that the People”s Bank of China (PBOC) will maintain a “moderately loose” monetary policy throughout 2026. This stance is expected to support domestic demand and keep the Chinese Yuan (CNY) at the lower end of its trading range. China”s GDP growth slowed to 4.5% year-on-year in the fourth quarter, reinforcing the need for further policy adjustments.
As the PBOC prepares for its meeting on February 20, the market will closely monitor any potential monetary easing measures aimed at countering structural slowdowns within the economy. Analysts foresee that additional policy easing may be necessary in the first half of 2026 to bolster economic activity and stimulate credit demand.
In summary, while the CPI slowdown presents challenges, the PBOC”s commitment to a supportive monetary environment suggests a cautious optimism for gradual reflation. Investors and market participants will need to stay alert as these developments unfold, particularly as they could influence the trajectory of the CNY against the USD in the coming years.
