China’s Price Pressures Cool Again, Keeping Deflation Fears Alive

China's most recent inflation data for January 2026 indicates that price momentum is decelerating; headline CPI increased just 0.2% year-on-year, significantly down from 0.8% in December and undershooting projections of 0.4%. CPI rose 0.2% monthly, at the same pace as December but less than the expected 0.3%, highlighting the vulnerability of consumer pricing gains. Core CPI, which removes erratic food and energy elements, decreased to 0.8% y/y from 1.2%, therefore indicating widespread weakness in underlying demand.

Deflationary forces on the industrial side are abating but still firmly present. A smaller drop than December's -1.9% and somewhat better than the consensus -1.5%, the Producer Price Index fell 1.4% y/y, implies that factory-gate price deflation is slowly moderating. Rising 0.4% month-on-month, PPI continued a four-month streak supported in part by increased worldwide gold prices and some stabilization in upstream expenses.

Taken together, the statistics support a deflationary background in China as both consumer and producer prices indicate subdued pricing power across the whole economy. The somewhat 0.2% y/y increase in non-food CPI shows how little underlying demand still limits price inflation. As policymakers deal with weak demand, thin inflation buffers, and the necessity to support growth without causing financial instability, this environment is expected to keep the door open for more financial easing by the PBOC.