Inflation contraction, increased space for monetary policy easing

Event

China's March CPI year-on-year -0.1%, Wind average expectation -0.1%, previous value -0.7%; month-on-month -0.4%, previous value -0.2%.

China's March core CPI year-on-year 0.5%, previous value -0.1%; month-on-month unchanged, previous value -0.2%.

China's March PPI year-on-year -2.5%, Wind average expectation -2.2%, previous value -2.2%; month-on-month -0.4%, previous value -0.1%.

Comment

In March, PPI decreased by 0.4% month-on-month, and the year-on-year PPI dropped to -2.5%, indicating weakening industrial product prices; downstream demand in March generally recovered weakly, and market expectations were relatively calm. Due to the decline in international oil prices to low levels and the continuous decline in domestic coal prices, energy and chemical product prices fell back, further dragging down the PPI decline. In March, CPI decreased by 0.4% month-on-month, and the year-on-year CPI rose from -0.7% in February to -0.1%. In March, prices of fresh vegetables and pork declined, with both food and non-food prices remaining weak, leading to low inflation on the consumption side.

Looking ahead, regarding PPI, the U.S. tariff increases have caused turmoil in global financial markets, and prices of commodities such as crude oil and copper have declined. We believe that the year-on-year decline in PPI may expand in April; regarding CPI, food prices may stabilize in April, but core inflation remains sluggish. Coupled with the downward pressure on commodity prices, we believe that the year-on-year CPI may still be in negative territory in April.

In April, the U.S. announced tariff increases on imported goods, leading to turmoil in global financial markets and heightened risks of global economic recession. We believe that U.S. tariffs may put pressure on China's economy, with two main impact pathways: first, the intensification of Sino-U.S. trade frictions poses a risk of decline in China's exports to the U.S.; second, a potential global economic downturn may lead to an overall contraction in external demand, putting downward pressure on China's exports to other economies. To hedge against the adverse effects of U.S. tariffs, we believe that China's macro policies may be further relaxed. The decline in external demand may also exacerbate the issue of oversupply in domestic goods, further pressuring domestic commodity prices. Weakening inflation may lead to higher real interest rates, which is unfavorable for corporate investment and household consumption.

We expect monetary policy to continue to push nominal interest rates down, with monetary easing likely accelerating in the second quarter, and the central rate of funding expected to decline. Against the backdrop of U.S. tariff disturbances, we continue to favor safe-haven assets. Recently, domestic bond yields have fallen, and we believe that as the impact of tariffs on the economy unfolds, there is still considerable room for bond yields to decline. We remain optimistic about the domestic bond market and continue to recommend focusing on trading opportunities.

March CPI year-on-year decline narrows, core CPI turns positive, but may still face pressure ahead

As the impact of the Spring Festival's timing fades, March CPI year-on-year narrowed from -0.7% last month to -0.1%, and core CPI year-on-year turned positive from -0.1% last month to 0.5%. From a breakdown perspective, the year-on-year decline in food inflation in March narrowed to -1.4%, mainly due to the narrowing year-on-year decline in prices of fresh vegetables and meat, as well as the year-on-year price of fresh fruits turning positive. However, from a month-on-month perspective, due to warmer weather benefiting the storage and transportation of fresh food, the price declines of fresh vegetables and meat have expanded, and food prices continue to decline under this influence In other major categories, the inflation of cultural and tourism projects turned positive year-on-year in March, while the cooling of travel and outings continued to weigh down on the month-on-month perspective; the inflation of transportation and communication categories continued to widen both year-on-year and month-on-month in March, mainly influenced by the decline in international oil prices; the clothing category showed improvement both year-on-year and month-on-month in March; the inflation of daily necessities and services turned positive both year-on-year and month-on-month in March, with the prices of household appliances rising further month-on-month providing support, while the month-on-month decline in domestic service inflation also narrowed.

In the short term, high-frequency data shows that food prices have stabilized since April, but core inflation may still be operating at a relatively low level. Coupled with the potential downward impact on commodity prices, we believe that the year-on-year CPI in April may still be in negative territory.

Chart 1: Core CPI and Service CPI

Note: Data as of March 2025

Source: Wind, CICC Research Department

Chart 2: Year-on-year changes in CPI items for February

Source: Wind, CICC Research Department

Affected by the decline in crude oil and coal prices, the month-on-month decline in industrial product prices expanded in March

In March, the PPI decreased by 0.4% month-on-month, and the year-on-year PPI fell to -2.5%, indicating a weakening of industrial product prices; downstream demand in March generally recovered slowly, and market expectations were relatively calm. Due to the decline in international crude oil prices to low levels and the continuous decline in domestic coal prices, the prices of energy and chemical products fell, leading to an expansion of the PPI decline. By industry, in the black category, the demand for construction steel in March recovered slowly, coupled with an increase in steel production, resulting in overall weak steel prices; in the energy and chemical sector, the price of thermal coal continued to decline in March, and international crude oil prices fell to low levels, causing prices in the energy and chemical industry chain to retreat; in the glass sector, downstream deep processing orders were insufficient compared to the same period last year, and insufficient demand led to slow glass inventory reduction, with glass prices operating at low levels; in the non-ferrous sector, factors such as U.S. tariffs pushed overseas copper prices up in March, but weak demand led to a generally weak performance in domestic non-ferrous metals. Overall, affected by the decline in crude oil and coal prices, the prices in the energy and chemical industry chain saw significant declines, and industrial product prices fell month-on-month.

Looking ahead, the U.S. tariff increases in April led to turmoil in global financial markets, and the prices of commodities such as crude oil and copper declined. We believe that the year-on-year decline in PPI in April may expand.

Chart 3: Year-on-year PPI by industry for March 2025

Note: Data as of March 2025 Source: Wind, CICC Research Department

Authors: Geng Anqi, Chen Jianheng, Fan Yangyang, Source: CICC Fixed Income Research, Original Title: "[CICC Fixed Income] Inflation Contraction, Increased Space for Monetary Policy Easing - March Inflation Data Commentary"

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