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Tony Zhao

China may finally have a chance to loosen the grip of deflation. Yet, the more important question is whether it can do so without making households feel poorer first.
The latest producer price index (PPI), which measures the prices factories charge, brings that possibility back into serious debate. China’s March PPI rose by 0.5 per cent year on year, ending 41 months of decline; it was up 1 per cent from February. After years of weak prices, cautious household spending and squeezed corporate margins, this modest return to producer-price inflation was enough to revive talk of China escaping deflation.
But last month’s purchasing managers’ index (PMI) suggests a rockier path than some might expect – and why the policy window should not be wasted.
Manufacturing remained in expansion with the official April PMI at 50.3, but non-manufacturing activity returned to contraction at 49.4, with services at 49.6 and construction at 48.0. While the index for raw material purchase prices remained elevated at 63.7, the factory-gate price index stood at 55.1. This means price pressure is returning ahead of demand, profits and household confidence.
This is why this moment matters. If the producer price uptick can be reinforced by stronger household demand and firmer expectations, this could mark the start of a broader recovery. Otherwise, China risks a more fragile outcome, where rising cost pressure is not matched by consumption strength, with a price rebound that weakens confidence rather than restoring it.
The rebound’s immediate drivers are clear. Rising prices of oil and other commodities have pushed up costs while domestic supply-side adjustments, including curbs in sectors experiencing excessive competition, are taking effect. Meanwhile, a demand boost linked to artificial intelligence, green technology and digital infrastructure has supported prices in selected industrial segments.

Yet this remains an upstream story. The challenge is not whether producer prices can recover for several months, but whether the price recovery can be transmitted through the rest of the economy. April’s PMI figures sharpen this point: manufacturing is expanding but services and construction are not. This is not the profile of a full-fledged recovery but an economy steered by price pressure.
That is where the constraint lies. China’s problem was never simply industrial prices falling; it is that domestic demand, especially consumption, has remained too weak to sustain a broader recovery in prices, profits and incomes.
Investment and production-led demand may lift activity in the short term. But they are not the same as consumption, and in an economy prone to excess capacity, they add to supply more than to durable demand.
For this reason, a PPI rise alone is unlikely to produce the virtuous circle policymakers wish for. If higher upstream prices are not matched by stronger end demand, companies face rising input costs without a commensurate increase in sales or pricing power. Companies, especially those in highly competitive sectors, may choose to absorb those costs. In such a case, higher producer prices do not translate into healthier reflation downstream – they simply squeeze profitability.
If profitability does not recover in a broad-based way, there is little reason to expect any meaningful improvement in wages, household income or consumer confidence. The challenge is not whether prices can rise, but whether they rise in a way that households and firms can bear. If prices move up before incomes do, reflation may start to feel painful rather than expansionary.


Still, this moment should not be dismissed. China has spent years contending not only with weak prices but also the accompanying psychology: cautious spending, delayed purchases and a conviction that tomorrow will be cheaper. If this conviction weakens under cost surges, policymakers have a chance to support household demand when such support is likely to be spent rather than saved.
In earlier debates, cash support was often argued against on the grounds that cautious households might simply save it. But policy effectiveness depends on timing. Consumers may be more willing to spend when waiting no longer promises a better deal.
This does not mean any transfer will automatically revive consumption, but it does mean more direct support for household purchasing deserves much more serious consideration now. The point is not to create inflation for its sake – it is to ensure a change in price expectations is matched by stronger household cash flow, so reflation becomes a source of recovery rather than more pressure.
Such an approach also has one advantage over another round of debt-heavy, investment-led stimulus. Local government finances are strained and further reliance on conventional investment expansion risks deepening balance-sheet problems.

The deeper issue stems from structural roots. China’s growth model, which helped produce its economic miracle, has proved remarkably effective at mobilising investment, building industrial capacity and delivering rapid development. Yet, these institutional incentives now carry greater costs amid maturing domestic demand, persistent overcapacity and accelerating deglobalisation.
China’s problem is no longer whether it can produce more. It is whether enough of the gains from growth reach households in a way that allows consumption to play a larger, more stabilising role. An economy that generates supply more easily than household purchasing power remains vulnerable to repeated bouts of weak prices, squeezed margins and fragile confidence, as well as international political pushback.
China’s latest data calls for hope but not a premature celebration. Unless policymakers use this moment well, the rebound will prove temporary, and may leave households feeling worse before the economy feels better.


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The producer price uptick offers a policy window: if reinforced by household demand and expectations, it could kick off a broader recovery


The producer price uptick offers a policy window: if reinforced by household demand and expectations, it could kick off a broader recovery.


Can China engineer a price recovery that doesn’t make people feel poorer?

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}The producer price uptick offers a policy window: if reinforced by household demand and expectations, it could kick off a broader recovery

The producer price uptick offers a policy window: if reinforced by household demand and expectations, it could kick off a broader recovery