Consumer inflation in China climbed to its highest level in more than three years in February, supported by a surge in holiday travel and spending during the Lunar New Year period, even as persistent deflation in the industrial sector underscored the fragile state of the world’s second-largest economy.
Data released Monday by the National Bureau of Statistics of China showed the consumer price index rose 1.3% year-on-year, marking the fifth straight month of gains. The increase was significantly higher than January’s 0.2% rise and exceeded economists’ expectations of 0.8% in a poll conducted by Reuters.
The reading represents the fastest pace of consumer inflation in 37 months.
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Economists quoted by Reuters say the acceleration was largely driven by seasonal spending linked to the Lunar New Year holiday, one of the country’s busiest travel periods, when hundreds of millions of people move across the country for family gatherings.
Airline ticket prices jumped 29.1% from a year earlier, reflecting a surge in domestic tourism, while gold jewellery prices rose sharply by 76.6% as consumers increased spending on gifts and luxury items during the festivities.
Core inflation — which excludes volatile food and energy prices — also strengthened, rising 1.8% year-on-year compared with 0.8% in January, suggesting a modest improvement in underlying price pressures.
On a monthly basis, consumer prices rose 1% in February, compared with 0.2% in January and well above the 0.5% increase expected by economists.
Energy shock adds to inflation pressure
Rising global energy prices are also beginning to filter into China’s inflation data. Benchmark Brent crude has surged above $90 per barrel amid supply disruptions tied to the escalating conflict involving the United States, Israel, and Iran.
The standoff has slowed tanker traffic through the strategically vital Strait of Hormuz, a shipping corridor responsible for roughly one-fifth of the world’s oil supply.
Zichun Huang, a Chinese economist at Capital Economics, said the oil shock could temporarily push inflation higher in China as energy and transportation costs rise.
“Tensions in the Middle East will push inflation higher for as long as global energy prices remain elevated,” Huang said.
However, he warned the inflation uptick may prove short-lived if geopolitical tensions ease.
China’s latest five-year economic plan, unveiled at the annual parliament session, offered relatively limited measures aimed at stimulating household consumption — a key factor that analysts say remains necessary for a sustained recovery in inflation.
Persistent factory deflation highlights weak demand
Despite the rise in consumer prices, China’s industrial sector continues to struggle with deflation. The producer price index, which tracks prices charged by manufacturers at the factory gate, fell 0.9% year-on-year in February. The decline was smaller than January’s 1.4% drop and better than the 1.2% decrease expected by economists.
The improvement suggests that deflationary pressures in the manufacturing sector may be stabilizing, though they remain entrenched.
According to NBS statistician Dong Lijuan, stronger prices in advanced manufacturing sectors and government measures to manage industrial capacity helped moderate the decline.
Producer prices also rose 0.4% month-on-month, partly driven by higher crude oil prices and stronger demand linked to computing power and technology-related industries.
However, the long-running drop in factory-gate prices continues to squeeze profit margins for manufacturers and reflects ongoing weakness in domestic demand. Many industrial sectors still face excess production capacity after years of rapid investment and expansion.
Structural pressures on the economy
China’s broader economic outlook remains constrained by several structural headwinds. A prolonged downturn in the property market has weighed heavily on household wealth and consumer confidence, while weak global trade growth and rising protectionist policies have created additional uncertainty for exporters.
Trade tensions with the United States, including tariffs and technology restrictions, have added pressure on policymakers attempting to stabilize growth. At the same time, falling prices across many sectors have encouraged consumers and businesses to delay spending in anticipation of lower costs later, reinforcing deflationary expectations.
To address these challenges, Beijing has pledged to reduce excessive competition in certain industries and accelerate the exit of inefficient factories in order to stabilize prices and improve profitability.
Policy outlook and growth targets
Chinese policymakers have set an economic growth target of between 4.5% and 5% for 2026, slightly lower than last year’s goal of “around 5%.”
The adjustment is seen as a willingness by authorities to accept slightly slower growth while implementing structural reforms aimed at reducing the economy’s reliance on exports and property investment.
The government also kept its annual inflation target unchanged at around 2%. Officials say the target is intended to guide market expectations while leaving room for macroeconomic adjustments.
The People’s Bank of China has already started loosening monetary conditions. In January, the central bank cut several sector-specific lending rates and expanded access to low-cost credit for small and medium-sized technology and private companies.
Lynn Song, chief economist for Greater China at ING Group, said the latest inflation figures are unlikely to prevent further policy easing.
“Unless the oil price shock is notably stronger and longer than expected, it’s not expected that inflation will inhibit PBOC easing this year,” Song said.
He added that the central bank could still implement an interest rate cut in the second quarter if economic activity remains weak, although policymakers may adopt a cautious approach depending on global conditions.