For years, China has been battling deflation.
But as of last month, it faces the opposite problem — a shift that couldn’t have come at a worse time.
The Iran war has delivered an energy price shock that has rippled through China’s economy at rapid speed.
The U.S.-Israel strikes on Iran began on February 28 — by March, PMI survey data was already pointing to the fastest rise in input costs in four years.
And this week, the stats bureau confirmed it: China’s deflationary cycle has come to a sudden end — just not in the way Beijing had hoped.
Throughout March:
Producer prices (PPI) grew 0.5% y/y — the first year-on-year increase in over three years
On a month-on-month basis, PPI for the oil and gas extraction subsector surged 15.8%
China’s purchasing price index — which measures manufacturers’ input costs — rose 0.8% y/y, the first increase since 2023
The energy shock is feeding through to consumers, too.
Transportation fuel costs rose 10.0% month-on-month throughout March.
Major Chinese airlines hiked domestic fuel surcharges sixfold.
But here’s the catch: This is the wrong kind of inflation.
Cost-push inflation — driven by a supply shock rather than strengthening demand — does not solve China’s deflation problem in the way demand-pull inflation would.
It compresses margins rather than expanding them, and squeezes household disposable income without improving consumer confidence or the propensity to spend.
To Beijing’s credit, policymakers have pulled out all the stops to cushion the blow.
Throughout Jan-Feb, China pre-emptively boosted crude oil imports nearly 16% y/y, adding to strategic reserves that provide 3-4 months of import cover.
Beijing has also restricted fuel exports to preserve domestic availability.
Meanwhile, the macro planner (NDRC) has intervened multiple times in its standard fuel price adjustment cycle, capping retail gasoline and diesel price increases at roughly half the level that would normally apply — a rare measure not seen since 2013.
And yet, the squeeze is still coming through.
Reporters visiting home appliance stores across Shanghai found staff at consumer electronics company TCL warning that TV prices are set to increase 8%, while staff at home appliance manufacturer Midea said refrigerator prices could rise by “several thousand yuan.”
Staff at other brands echoed similar expectations.
The risk now is that cost-push inflation hits consumption precisely when Beijing has less room to respond.
With consumer goods trade-in subsidies already trimmed this year and interest rate cuts on hold until at least H2, the government’s ability to offset the squeeze on household purchasing power is more limited than it was a year ago.
The irony is that Beijing entered 2026 hoping to engineer a gradual reflation through demand-led mechanisms — trade-in subsidies, services consumption, and recovering business confidence.
What it has received instead is a cost shock disproportionately concentrated in input prices.
The upshot: The deflationary era in China may be over.
But what’s replacing it won’t feel like good news to most Chinese households — or to the businesses that serve them.
Joe Peissel, Senior Macroeconomic Analyst, Trivium China
What You Missed
Econ and finance
Authorities are broadening the ways households can spend their housing provident fund (HPF) balances.
The HPF is China’s compulsory, employer/employee-funded social insurance program designed to help citizens save for home purchases, offering below-market-rate mortgage loans.
Hangzhou now allows HPF withdrawals to cover deed tax and property management fees.
Meanwhile, Chengdu and Xuzhou have moved beyond housing-related spending, allowing HPF funds to cover major medical expenses.
Business environment
On Thursday, the State Council released the master plan for the China (Inner Mongolia) Pilot Free Trade Zone.
Inner Mongolia handles roughly 95% of China-Mongolia overland transport and over 65% of China-Russia overland freight.
The new FTZ will be China’s 23rd, spanning 120 sq km across three zones — Hohhot, Manzhouli, and Erlianhot.
The plan includes measures to boost trade in commodities, including expanding imports of agricultural and food products, promoting outbound investment in energy and resources, and developing LPG and fluorochemical industries in Erlianhot.
On Wednesday, the state asset regulator (SASAC) established a new department — the Bureau of Overseas Foreign Investment Administration.
The bureau’s responsibilities include guiding central SOEs’ international operations, optimizing the allocation and structure of overseas assets, and strengthening risk prevention and mitigation in overseas investment.
Industry executives told Caixin the move signals the rising importance of overseas operations: “The consolidation suggests overseas operations are shifting from a supporting role to an integral part of core business.”
Tech
On Monday, the Ministry of Commerce (MofCom) and five other agencies issued guidance on promoting e-commerce development, with a significant focus on cross-border expansion.
Per the document, China will establish service platforms to help e-commerce firms navigate foreign regulations.
The document also emphasizes that firms should build “localized operational capabilities” and engage in “fair and orderly competition.”
The guidance’s emphasis on compliance reflects officials’ recognition that aggressive expansion tactics by Chinese platforms have created political friction.
On April 3, the industry regulator’s (MIIT) electronics division held consultations with ZTE and Xiaomi as part of drafting the 15th Five-Year Plan for electronics manufacturing.
Both companies emphasized that the 15th FYP period is a “critical window” for industry transformation, with AI reshaping the sector and driving growth in AI terminals, computing infrastructure, and intelligent connected vehicles.
This is a heads-up that a formal electronics manufacturing FYP is coming, but is still in the drafting stages.
Politics
On April 3, state media announced that Politburo member Ma Xingrui is “suspected of serious violations of discipline and law and currently under disciplinary review and supervisory investigation.”
Ma is the third Politburo member to be put under investigation since the October 2022 20th Party Congress, along with Generals Zhang Youxia and He Weidong.
While it’s not clear what got Ma in trouble, he has deep ties with China’s aerospace sector, which has been caught up in the sweeping anti-corruption campaign wracking the defense-industrial complex.
Foreign affairs
On Wednesday, Iran and the U.S. agreed to cease hostilities for two weeks — and China was apparently key to getting Iran to the table.
Per the New York Times: “Iran accepted Pakistan’s two-week cease-fire proposal following frantic diplomatic efforts by Pakistan and last-minute intervention by China, a key ally, asking Iran to show flexibility and defuse tensions…according to three Iranian officials.”
Iran’s ambassador to China, Abdolreza Rahmani Fazli, also reportedly said China still has a big role to play in helping keep the peace.
U.S.-China
On Tuesday, when discussing U.S. President Donald Trump’s upcoming state visit to China, U.S. Trade Representative Jamieson Greer said: “When we think about what to expect for the president’s meeting…we’re looking to maintain that stability.
Greer signaled that the proposed “Board of Trade” will be a big topic at the summit, describing it as: “A mechanism where we can work out with the Chinese what are the non-sensitive goods that we should be trading with each other.”
However, he threw cold water on a potential “Board of Investment,” saying that trade is the current priority in bilateral economic relations.
As always, it was a busy week in China.
Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.