Energy prices lift China’s inflation gauges in September
The commentary highlights that China's inflation metrics are experiencing upward pressure from energy prices, with September's PPI inflation reaching its highest level since 2022. Per the full note , consumer prices also edged higher, primarily influenced by energy and technology costs, despite ongoing deflationary pressures in sectors like food and housing. The broader implication for FX traders is that while inflation in China remains contained below the government's 2% target, the rising PPI could influence expectations around monetary policy adjustments from the People's Bank of China, especially amid mixed indicators in consumer inflation. With the lack of immediate high-impact events on the calendar, this data may spur interest in currency pair movements ahead of future policy signals.
What the desk is arguing
The desk frames this as a potential turning point for China's inflation outlook, where rising energy costs could shift market dynamics. The recent figures indicate that China's PPI inflation surged to 5.0% YoY in September, a significant increase that draws attention to the nation’s inflation trajectory, which many feared had slipped into a deflationary spiral.
Supporting evidence from the report underscores this trend, noting that while CPI inflation increased mildly to 0.9% YoY, it aligns with market forecasts. However, the persistent issues in food and rental prices—which decreased by 1.7% and 0.6% YoY respectively—are signs that underlying deflationary pressures still linger and could dampen overall growth.
Where it sits in our coverage
Our consensus targets for USD/CNY include a forecast of 1.075, with a range from 1.04 to 1.12, informed by firm estimates: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26) This view suggests that the desk’s assessment aligns closely with the upper end of this target range, building a case for potential yuan weakness should inflation pressures force the PBoC into a policy rethink.
How other firms see it
The growing inflation outlook appears to align well with firms such as jpmorgan and citi, who anticipate that the PBoC might adjust its stance. Conversely, bofa holds a more conservative view, projecting lower levels for the CNY. Traders should keep an eye on related currency pairs like USD/CNH and EUR/CNY, as they may respond to shifts in inflation expectations and monetary policy stances in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's PPI inflation reached 5.0% YoY in September, the highest since 2022.
- 02CPI inflation increased slightly to 0.9% YoY but remains below the target of 2%.
- 03Persistent deflationary pressures in food and rental prices could weigh on growth.
- 04Energy and tech prices are currently the main contributors to inflation.
Market implications
Traders should monitor the CNY closely for potential volatility, particularly as inflation trends evolve. A significant level to watch will be the 1.08 handle in USD/CNY, which, if breached, may indicate a stronger positioning shift in response to inflation data.
Risks to this view
A reversal in the current inflation trajectory, particularly a sharper-than-expected decline in energy prices or a resurgence in food price deflation could undermine the case for a stronger PBoC response, leading to weakened sentiment around the CNY.
Older quick take Quick take Published 03:39 China Energy prices lift China’s inflation gauges in September China’s PPI inflation hit its highest level since 2022, while consumer prices also edged higher amid rising energy and tech prices. Overall, Chinese inflation remains relatively under control compared to global peers Source: Shutterstock 5.0% YoY China's September PPI inflation Highest since 2022 Higher than expected CPI inflation edges up overall amid offsetting factors China’s CPI inflation rose 0.9% year-on-year in September, up slightly from 0.8% in August, and broadly in line with forecasts (market: 1.0%, ING: 1.0%). Through the first three quarters of the year, CPI inflation is 0.9% YoY.
Chinese prices look set to end the year solidly in positive territory. The big question for markets is whether China has successfully exited deflation. We think the worst of deflationary pressure may have passed, though downside pressures remain.
Several notable drags remain. The first is food prices, which fell -1.7% YoY in September. The biggest drag in this category remains pork prices (-10.0%).
Yet, this is starting to diminish as pork price inflation has risen for 4 consecutive months. The second is rental prices, which fell -0.6% YoY for a sixth consecutive month. This component looks likely to remain a drag on overall inflation, as housing prices have yet to confirm a bottom.
We’ve observed price stabilisation in tier 1 cities this year. Together, food and housing account for around half of the CPI basket. Auto prices (-1.7%) are also adding to deflationary pressures amid heightened competition among Chinese automakers.
On the flip side, energy and tech remain the main drivers of inflation, with transportation fuels up 14.9% YoY and communication devices up 14.3% in September. Overall, inflation remains comfortably below the 2% target set at this year's Two Sessions. The People's Bank of China has rolled out targeted easing measures over the past few weeks.
So, inflation still isn't impeding policy easing. Energy and tech prices are driving China's reflation PPI inflation hits the highest level since 2022 PPI inflation rose sharply to 5.0% YoY in September, up from 3.8% in August, and comfortably beating forecasts (market: 4.4%, ING: 4.3%). PPI inflation is now up 2.3% YoY through the first three quarters of the year.
PPI rose mainly on producer goods inflation (6.5%), driven by mining (25.4%) and raw materials (9.4%). Producer prices of consumer goods, by contrast, were still contracting at -0.1% YoY, though they have been trending higher and may soon return to positive territory for the first time since 2023. Ex-factory prices saw the biggest spikes in energy-related industries.
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