China consumer inflation hits three-year high as producer deflation eases

China’s consumer inflation recorded the biggest jump in more than three years, as an extended holiday bolstered spending while deflation in factory-gate prices moderated.

The consumer price index rose 1.3% in February from a year earlier, China’s National Bureau of Statistics data showed Monday, beating economists’ forecasts for a 0.8% increase in a Reuters poll. The increase, following a 0.2% rise in January, marked the strongest rebound since January 2023, according to LSEG data.

On a monthly basis, prices gained 1% in February, above economists’ expectations for a 0.5% rise.

Core CPI, which strips out volatile food and energy prices, climbed 1.8% last month from a year earlier, matching the pace last seen in March 2019, according to official data compiled by Wind Information.

“The price hikes in the service sector during the Chinese New Year is stronger than market expected [and] whether this effect will be persistent beyond the holiday is not clear at this stage,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said in a note Monday.

Service prices rose 1.1% last month from a year earlier, contributing 0.54 percentage points to the headline CPI, the official data showed, driven by demand for travel, pet care, vehicle maintenance, movies, and dining services during the holiday.

This year’s Lunar New Year holiday ran from Feb.15 to Feb. 23 — the longest on record — compared with eight days spanning late January to early February last year.

China’s producer price index slumped 0.9% from a year ago, better than economists’ expectations of a 1.2% fall, marking the slowest pace of deflation in more than a year, as surging costs for metals and commodities helped put a tentative floor under factory-gate prices.

At a top economic policy-setting meeting last week, China kept its annual consumer inflation target steady at “around 2%” for 2026. First set in 2025, it is the lowest level in more than two decades as Chinese policymakers sought to bolster domestic demand and rein in aggressive price wars sweeping across many industries.

The inflation target acts more as a ceiling than a target to be realized. In 2025, consumer prices were flat overall, while core inflation rose 0.7% as consumer confidence remained soft.

Beijing also lowered its GDP growth target this year to a range of 4.5% to 5%, the least ambitious target on record since the early 1990s, as officials acknowledged persistent deflationary pressures and heightened geopolitical uncertainty.

To bolster domestic spending, Chinese officials allocated 250 billion yuan ($36.2 billion) in this year’s fiscal budget to subsidize a consumer trade-in program — down from 300 billion yuan in 2025 — along with a 100 billion yuan government fund to support private investment and consumer spending.

“The pace [of these stimulus measures] will remain incremental,” said Larry Hu, chief China economist at Macquarie, noting that while policymakers see weak consumption as a structural issue to be addressed, the need for “aggressive consumption stimulus is low” with exports and manufacturing seen to continue powering growth.

“The main swing factor is exports,” Hu said in a note last Thursday. “If exports remain strong, policymakers may continue to tolerate weak domestic consumption. Conversely, if exports falter, they will step up domestic stimulus to defend the GDP target.”

Geopolitical tensions, exacerbated by the ongoing conflict in the Middle East, have pushed up gold jewelry and gasoline prices in China by 6.2% and 3.1%, respectively, in February. Factory-gate prices for silver and gold refining jumped 16.9% and 8.4%, while prices for oil and gas extraction climbed 5.1%.

The Middle East war, which has shown little sign of easing, may continue to push China’s producer prices higher at least through March, said Zhang, warning that a prolonged conflict risks tipping the global economy into stagflation.

China may need to implement a more proactive fiscal policy than its budget, unveiled last week, if Middle East tensions fail to de-escalate in the second quarter, Zhang said.