(Yicai) March 12 -- China’s price levels this year are expected to break away from the low levels seen recently and rise to better align with overall economic conditions, supported by a mix of domestic and international factors, such as surging oil prices, growing demand for gold and non-ferrous metals as well as the country’s efforts to rein in excess capacity.

So far this year, prices have continued the gradual rebound that started in the second half of last year. From January to February, China’s consumer price index, which is a key gauge of inflation, climbed 0.8 percent from the year before, the same pace as in December, according to data released by the National Bureau of Statistics. Core CPI, which excludes food and energy, advanced 1.3 percent, slightly higher than December’s 1.2 percent.

Meanwhile, the producer price index, which is a measure of industrial profits, tumbled 0.9 percent, but the decline narrowed 0.5 percentage point from December, indicating a potential turnaround in the second quarter.

Looking ahead for the year, several factors could keep pushing prices upward.

First, rising tensions in the Middle East have driven up oil prices, creating the risk of imported inflation. Due to the blockade of the Strait of Hormuz, one of the world’s most important oil shipping routes, international crude prices almost touched USD120 per barrel on March 9 and are remaining above USD90.

If the conflict drags on and the Strait of Hormuz remains closed to shipping, oil prices could climb further, which would lead to a spillover effect in other sectors. This, in turn, may help lift inflation expectations and drive a rebound in prices.

Second, strong prices for gold and non-ferrous metals could support improvements in both the CPI and PPI. As we move into 2026, the global political and economic landscape is undergoing profound adjustments and geopolitical conflicts are becoming more frequent. This has strengthened gold’s role as a safe-haven asset. At the same time, demand for non-ferrous metals such as copper is increasing sharply, driven by advancements in industries such as artificial intelligence and renewable energy, keeping prices elevated.

Finally, China’s efforts to curb 'involution-style competition,' or cut-throat price wars, may help prices recover in some industries. For example, in February, prices for solar equipment and components rose 3.2 percent from the year before, a widening of 2.7 percentage points from January. Lithium battery manufacturing prices also edged up 0.2 percent last month, reversing a 1.1 percent drop in January and marking the first uptick after 33 straight months of declines. This suggests China’s efforts to manage excess capacity in key industries are starting to work.

Ongoing Challenges

Despite these positive factors, there are still challenges that could limit how much prices rise. The first is weak domestic demand, which has not been fully resolved yet. The ongoing adjustment in the real estate sector and sluggish consumer spending remain major problems and will take time to fix.

Second, wage growth is slowing. Last year, wage income for Chinese residents dropped from 5.8 percent in 2024 to 5.3 percent. Slower wage growth could make people less willing to spend, which would make it harder for prices to rise.

Finally, it is important to be vigilant about the negative effects of rising oil prices. As crude oil is a key raw material for the industrial system, an increase in oil prices will lead to higher production costs for downstream industries such as chemicals, transportation and equipment manufacturing. This could hurt corporate profits, especially for small and medium-sized manufacturers with weaker bargaining power.

Given these constraints, China still needs to take proactive measures. For instance, if prices fall below a reasonable range, the government should quickly step in with supportive policies such as lowering banks’ reserve requirement ratios and interest rates as well as utilizing targeted monetary tools to inject liquidity. This would convey a clear signal to the market to help stabilize prices and prevent businesses and residents from developing deflation expectations.

The author of this article, Shen Jianguang, is chief economist at e-retailer JD.com.

Editor: Kim Taylor