It is advisable to incorporate the expected targets for CPI and core CPI into the monetary policy framework and establish a regular assessment and feedback mechanism for price trends. Historically, macro policy often emphasized preventing excessively rapid inflation, whereas current policy focuses on promoting a reasonable rebound in price levels, aligning with the economic situation. So, how should we view China's price situation in 2026 amid an increasingly complex domestic and external environment?
Price trends at the beginning of the year have been better than expected. Since the second half of 2025, positive changes have emerged in price movements. The year-on-year CPI has continued to recover, with the increase in December expanding to 0.8%, the highest since March 2023. The PPI decline has narrowed consistently, with the December year-on-year drop being the smallest since September 2024, primarily due to rising commodity prices. Since the start of 2026, prices have continued their upward trend, exceeding expectations. From January to February, the CPI rose 0.8% year-on-year, matching the level from December last year and higher than the -0.1% recorded in the same period last year. The core CPI accumulated a year-on-year increase of 1.3%, higher than the 1.2% in December. The PPI year-on-year decline narrowed further to 0.9%, significantly better than the -2.2% in the same period last year, with a high probability of turning positive in the second quarter.
Looking ahead for the full year, there are multiple factors supporting continued price recovery. Firstly, escalating tensions in the Middle East have driven a significant surge in oil prices, introducing risks of imported inflation. The blockade of the Strait of Hormuz has severely impacted crude oil supply, pushing Brent crude close to $120 per barrel at one point, and it currently remains above $90 per barrel. If the conflict persists and the Strait of Hormuz cannot reopen, the average oil price may continue to rise, potentially spreading to other categories, making the risk of imported inflation a point of concern. Beyond imported inflation, rising oil prices can also help boost price levels by improving inflation expectations.
Secondly, international gold prices remain high, continuously supporting CPI growth. Entering 2026, amid profound adjustments in the global political and economic landscape and frequent geopolitical conflicts, gold's role as a safe-haven and store of value remains prominent. In February, the year-on-year increase in domestic gold jewelry prices remained at 76.6%. Although surging global oil prices have fueled inflation expectations, tempering further sharp rises in gold, the spot gold price has stayed above $5,100 per ounce, still nearly 20% higher than at the end of last year. Assuming the spot gold price remains at $5,100 per ounce for the rest of the year, the increase compared to last year would still be approximately 47%, providing some support for domestic CPI growth.
Thirdly, international non-ferrous metal prices remain strong, aiding PPI improvement. Taking copper as an example, due to significantly increased demand from sectors like artificial intelligence and renewable energy, a pattern where copper prices are prone to rise rather than fall has been established. Since 2026, LME copper prices have been trading at high levels, with the latest price around $13,000 per ton, up about 5% from the end of last year. The sustained strength in non-ferrous metal prices helps further narrow the PPI decline or even turn it positive, but whether this translates into final consumer goods prices depends on the actual strength of domestic demand recovery.
Finally, comprehensive measures to address "involution-style" competition are promoting price recovery in some sectors. Benefiting from capacity management in key industries and comprehensive efforts to curb "involution-style" competition, prices for photovoltaic equipment and component manufacturing rose 3.2% in February, expanding by 2.7 percentage points from the previous month. Prices for lithium-ion battery manufacturing shifted from a 1.1% decline last month to a 0.2% increase, marking the first year-on-year increase after 33 consecutive months of decline. Price declines narrowed in coal mining and washing, cement manufacturing, new energy vehicle manufacturing, and ferrous metal smelting and pressing compared to the previous month. Regarding the CPI, the decline in transportation tool prices has narrowed continuously from -4.4% in February last year to -1.2% this February; besides trade-in policies, the effect of "anti-involution" measures should not be overlooked.
Additionally, from January to February, service prices within the CPI accumulated a year-on-year increase of 0.8%, higher than the 0.6% in December and the 0.5% for the full year last year, also serving as an important support for the CPI rebound at the start of the year. However, the recovery in service prices is closely related to robust resident travel and released service consumption demand during the Spring Festival "long holiday effect"; whether this can be sustained remains to be seen.
Promoting a reasonable price rebound still requires coordinated policy efforts. Although price performance in the first two months was good, and the full year is expected to escape the situation of persistently low price levels, it must be recognized that significant price recovery still faces constraints and challenges, necessitating coordinated efforts from aggregate, structural, and reform policies.
First, the pattern of strong supply and weak demand has not yet been reversed. The output gap (the difference between actual output and potential output) is a core indicator reflecting the aggregate supply-demand relationship. Theoretically, a negative output gap indicates downward pressure on inflation. According to the latest IMF estimates, China's output gap was -1% in 2025 and is projected to be -0.8% in 2026, still within negative territory. Insufficient domestic demand is the main reason for the negative output gap, with real estate adjustments and weak consumption being the primary issues, requiring further repair.
Second, the growth rate of wage income has slowed. Wage income, through production costs and household consumption, has a very significant impact on price trends. At the end of 2025, the number of urban employed persons increased by only 1.9 million compared to the end of the previous year, lower than the 3.13 million increase in 2024, reflecting continued significant pressure on total employment. Affected by this, the year-on-year growth rate of national residents' wage income decreased from 5.8% the previous year to 5.3% in 2025, significantly lower than the 8.6% in 2019. Considering that household consumption propensity has not yet improved, these factors will constrain the inflationary push from wage income.
Third, be vigilant about the negative impacts of rising oil prices. China has a high dependence on crude oil imports, and oil is a core basic raw material for the industrial system. Its price increase directly raises production costs for midstream and downstream industries such as petrochemicals, transportation, and equipment manufacturing. In this context, if the recovery of final demand remains weak, price increases driven by upstream costs may struggle to pass through to downstream consumption, potentially impacting corporate profitability, especially for small and medium-sized manufacturing firms with weaker bargaining power.
In response to the above constraints and challenges, policy levels have made active deployments. The Central Economic Work Conference in December 2025, for the first time, listed "reasonable price recovery" alongside "stable economic growth" as key considerations for monetary policy. The 2026 Government Work Report continued this formulation and proposed "improving the relationship between aggregate supply and demand to push the general price level from negative to positive, achieve a reasonable and moderate recovery in consumer prices, and promote a virtuous economic cycle."
The persistent low price levels in recent years result from the intertwined effects of cyclical, structural, and institutional factors. Beyond monetary policy, coordinated efforts from other policies are also needed. As mentioned by Chen Changsheng, Deputy Director of the State Council Research Office, at a press conference interpreting the Government Work Report, promoting reasonable price recovery requires a package of policies. This includes expanding domestic demand through more proactive and effective macro policies, continuing to deepen supply-side reforms especially regarding "involution" governance, promoting the stabilization of asset prices (particularly real estate prices), and advancing reforms in some key areas.
On this basis, the author believes that strengthening the binding force of price targets is also crucial. It is recommended to consider incorporating the expected targets for CPI and core CPI into the monetary policy operational framework and establishing a regular assessment and feedback mechanism for price trends. When prices remain below a reasonable range for an extended period, policy responses should be initiated promptly, using tools such as reserve requirement ratio cuts, interest rate cuts, and structural instruments to release liquidity, avoiding the self-reinforcement of low inflation expectations. Simultaneously, policy communication and expectation guidance should be strengthened to send clear signals of price stability to the market, preventing the formation of deflationary expectations among businesses and residents.