Consumer prices rose just 0.2% year-on-year in January, while factory-gate deflation stretched into a fourth year, reinforcing concerns that domestic demand remains too weak to generate sustained price momentum.

China’s consumer inflation rose less than expected in January, and producer prices continued to contract, underscoring persistent deflationary pressure in the world’s second-largest economy at a time when policymakers are weighing the scope of further stimulus.

Data released Wednesday by the National Bureau of Statistics showed the consumer price index (CPI) increased 0.2% from a year earlier, missing economists’ forecast of a 0.4% rise in a Reuters poll. The reading marked a sharp slowdown from December’s 0.8% annual increase, which had been the strongest in nearly three years.

On a month-on-month basis, CPI rose 0.2%, below expectations of a 0.3% increase.

Core CPI, which excludes volatile food and energy prices and is often viewed as a cleaner gauge of underlying demand, climbed 0.8% year-on-year. That was down from December’s 1.2%, indicating that even underlying price pressures softened at the start of the year.

At the factory gate, deflation persisted. The producer price index (PPI) fell 1.4% from a year earlier, slightly better than expectations for a 1.5% drop and an improvement from December’s 1.9% decline. On a monthly basis, however, PPI rose 0.4%, extending a modest recovery trend for a fourth straight month. Analysts partly attributed the month-on-month improvement to higher global gold prices in recent months.

Lunar New Year distortion complicates interpretation

Economists cautioned against overinterpreting January’s data in isolation due to calendar effects linked to the Lunar New Year, which falls in mid-February this year after occurring in January last year.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said the timing mismatch distorts seasonal spending and pricing patterns.

“This mismatch makes interpretation of macro data difficult,” Zhang said.

Zavier Wong, market analyst at eToro, said that “last January had more holiday-related price strength baked in, whereas this January does not.” He added that it “makes far more sense to treat January and February as a combined read rather than dissecting them individually.”

Holiday-driven travel, dining, and retail activity typically provides a temporary lift to prices. The shift in timing may therefore exaggerate the apparent slowdown in annual inflation.

Structural deflationary forces remain

Beyond seasonal effects, deeper structural pressures continue to weigh on prices. Producer price deflation has now persisted for more than three years, compressing profit margins across China’s industrial base. Manufacturers have contended with subdued domestic demand, excess capacity in several sectors, and trade frictions that disrupted supply chains and export channels last year.

Although China’s economy expanded 5% in 2025, meeting Beijing’s official target, growth was supported heavily by resilient exports to non-U.S. markets. Domestic consumption has struggled to regain sustained momentum since the end of pandemic restrictions, reflecting a prolonged property downturn and cautious household sentiment amid uncertain job prospects.

Overcapacity in industries ranging from manufacturing to green technology has intensified competition, prompting price cuts and price wars. Authorities have moved to curb what they describe as “disorderly” competition in certain sectors, aiming to stabilise corporate margins and restore pricing discipline.

Policy trade-offs: investment vs. consumption

The inflation data arrives as policymakers prepare to announce economic targets at next month’s annual parliamentary meeting. The People’s Bank of China reiterated in a policy report on Tuesday its intention to implement “appropriately loose” monetary policies to support the economy and guide prices toward “a reasonable recovery.”

However, Beijing faces trade-offs in how it stimulates growth.

Chetan Ahya, chief Asia economist at Morgan Stanley, wrote that policymakers continue to favor investment as the primary growth driver, while viewing direct stimulus for consumption as a “one-time boost” that could add to already elevated debt levels.

China’s fiscal metrics illustrate the challenge. According to Morgan Stanley, the country’s fiscal revenue-to-GDP ratio has declined by 4.8 percentage points since 2021 to 17.2%, reflecting slower growth and tax relief measures. Meanwhile, public debt-to-GDP has expanded by 40 percentage points since 2019, reaching 116% in 2025. Although that remains below the U.S. federal debt-to-GDP ratio of 124% in 2025, the trajectory underscores narrowing fiscal headroom.

With revenue growth under pressure and debt climbing, large-scale consumption subsidies or direct cash transfers would come at a cost policymakers appear reluctant to absorb.

Implications for markets and growth outlook

The data reinforces expectations that monetary policy will remain accommodative for financial markets. Weak price momentum gives the central bank space to ease further if needed, though currency stability and capital flows remain considerations.

For the real economy, the persistence of producer deflation signals ongoing strain in upstream industries. Even as month-on-month PPI shows tentative improvement, sustained year-on-year declines indicate limited pricing power and subdued demand conditions.

Ultimately, January’s figures suggest that China’s inflation trajectory remains fragile. Seasonal distortions may blur the short-term picture, but the broader pattern points to an economy still grappling with excess supply, cautious consumers, and a property sector that has yet to stabilize fully.

The coming months — particularly combined January-February data and policy signals from Beijing — will offer clearer insight into whether China can engineer a durable rebound in prices or whether deflationary pressures will continue to shadow its post-pandemic recovery.

Nigeria’s gross external reserves have climbed above $47 billion for the first time in nearly eight years, marking a symbolic and strategic milestone for the Central Bank of Nigeria (CBN) as it rebuilds external buffers amid ongoing macroeconomic adjustments.

Latest data show reserves rising to $47.025 billion, the highest level since August 3, 2018, when they stood at $47.01 billion. The crossing of the $47 billion threshold signals not just numerical progress but a shift in the country’s external liquidity dynamics after years of volatility.

The build-up has been gradual but consistent. Reserves closed 2025 at approximately $45.5 billion, up from about $40.8 billion at the start of the year — an annual accretion of nearly $4.7 billion. The momentum strengthened toward the year-end. In December 2025, reserves rose from roughly $44.8 billion to $45 billion, at the time described as a six-year high.

January 2026 accelerated that trajectory. Reserves opened the month at $45.565 billion and closed at $46.279 billion, reflecting a gain of more than $700 million. Within the first 22 days alone, the stock increased by about $509 million, underscoring sustained inflows and improved foreign exchange liquidity conditions. The steady climb since December 19, 2025, has now pushed reserves to their strongest level since 2018.

What is driving the reserve build-up?

Although a detailed breakdown of inflows has not yet been released, analysts point to a combination of oil-sector improvements and policy-driven reforms.

Improved crude oil production and firmer export receipts have strengthened foreign exchange inflows. At the same time, recent FX market reforms — including enhanced transparency and greater flexibility — have supported autonomous inflows and eased distortions that previously weighed on reserves.

Renewed foreign portfolio interest has also contributed to inflows, alongside multilateral and bilateral funding and stronger remittance flows. Collectively, these factors suggest a more stable external account relative to prior periods when reserves were under sustained pressure.

The rebound reinforces CBN’s medium-term target of building reserves to $51 billion by the end of 2026. At the current pace of accumulation, that target appears increasingly attainable, assuming oil prices remain supportive and FX reforms continue to anchor investor confidence.

A stronger reserve position enhances the CBN’s capacity to manage exchange-rate volatility, meet external obligations, and cushion external shocks. It also improves sovereign credit optics, particularly at a time when emerging markets are navigating tighter global liquidity conditions.

The other side of the ledger: rising debt service

Yet the strengthening reserve profile sits alongside mounting debt-service obligations at the subnational level.

States paid a combined N455.38 billion in foreign debt service in 2025, up from N362.08 billion in 2024, according to Federation Accounts Allocation Committee (FAAC) data released by the National Bureau of Statistics. The N93.30 billion increase represents a 25.77% year-on-year rise.

Under the FAAC framework, foreign debt service is treated as a first-line charge. Repayments are deducted at source before net allocations are distributed to states. This structure prioritizes debt obligations but reduces the fiscal space available for salaries, capital expenditure, and other statutory commitments.

Monthly patterns in 2025 show relative stability compared with 2024. Total foreign debt service stood at N40.09 billion in January 2025 before easing to N39.10 billion in February. From March to July, deductions remained flat at N39.10 billion, indicating fixed repayment commitments during that stretch.

A downward adjustment occurred in August to N36.14 billion, a 7.56% drop from July. That lower band persisted through September to December, suggesting a recalibrated but steady repayment structure in the final five months of the year.

By contrast, 2024 displayed sharper volatility. Deductions jumped from N9.88 billion in January to N24.53 billion in February and peaked at N40.41 billion in March. They then fell to N21.70 billion in April before rising again in August to N40.09 billion, where they remained through year-end.

The 2025 data reveal a significant concentration in the foreign debt burden. The top 10 states accounted for 68.57% of total foreign debt service.

Lagos recorded the highest deduction at N92.80 billion, up from N72.32 billion in 2024. The N20.49 billion increase represents 28.33% growth, with Lagos alone accounting for 20.38% of the national total.

Rivers followed at N48.58 billion, more than double its 2024 figure of N23.13 billion — a 110.02% increase. Ogun posted N25.20 billion, up from N11.99 billion, reflecting a 110.22% surge. Kaduna recorded N47.93 billion, a modest 5.13% rise from N45.59 billion.

Other states in the top bracket include Cross River (N21.01 billion), Oyo (N20.17 billion), Edo (N18.70 billion), Bauchi (N16.85 billion), Kano (N10.63 billion), and Ebonyi (N10.37 billion), all recording varying degrees of year-on-year growth.

Regional analysis shows the South-West bearing the largest share at N162.77 billion, representing 35.74% of the national total. The South-South followed with N100.37 billion (22.04%), while the North-West accounted for N81.97 billion (18.00%). The North-East recorded N42.42 billion (9.32%), the South-East N40.20 billion (8.83%), and the North-Central N27.65 billion (6.07%).

A macroeconomic balancing act

The juxtaposition is striking: external reserves are strengthening at the federal level, yet subnational fiscal pressure remains elevated due to rising foreign debt obligations.

A stronger reserve position supports exchange-rate stability and improves Nigeria’s external credibility. However, debt service deducted ahead of FAAC distribution constrains state-level spending capacity, particularly for infrastructure and social services.

The current environment underscores the structural nature of Nigeria’s external debt framework. While reserves provide a buffer against external shocks, sustained increases in debt service — especially under a first-line charge mechanism — can tighten liquidity for subnational governments.

For policymakers, the challenge is twofold: sustain reserve accumulation to anchor macro stability, while ensuring that debt obligations, particularly at the state level, remain manageable relative to revenue growth.

Analysts note that if the present pace of reserve accretion continues and oil receipts remain supportive, the CBN’s $51 billion target by end-2026 appears within reach. But the broader fiscal equation will depend on how effectively rising external buffers translate into durable economic resilience across all tiers of government.