China Set to Exit Deflation Cycle in Early 2026, ANZ Analysts Say

China may be closer to ending its prolonged deflationary period than financial markets currently anticipate, according to a recent note from ANZ analysts. The bank projects that three key price indicators — the producer price index (PPI), consumer price index (CPI), and GDP deflator — will all turn positive on a year-over-year basis by the first quarter of 2026. Most notably, the GDP deflator is forecast to rise approximately 0.5%, which would mark its first growth in three years.

The anticipated recovery is primarily being driven by imported inflation, with rising energy prices playing a central role. ANZ analysts characterize this as "bad" inflation, since higher energy costs risk compressing consumer spending and squeezing industrial profit margins in an already fragile economic environment. That said, the bank argues this form of inflation is still a more manageable outcome than continued deflation, which has been rooted in a persistent mismatch between supply and demand across the Chinese economy.

ANZ highlighted a critical limitation facing Chinese policymakers — while the country has strong capabilities in managing cost pressures, stimulating domestic consumption remains a significant challenge. Higher oil prices could indirectly benefit sectors like renewable energy, but are unlikely to correct the deeper structural imbalances weighing on the broader economy or meaningfully lift household spending.

To navigate the transition, Chinese authorities are expected to deploy a mix of policy instruments, including administrative price controls, tapping into strategic petroleum reserves, issuing fiscal subsidies, and broadening energy import sources to reduce dependency on any single supplier.

ANZ also noted that China is likely to press forward with supply-side reforms as part of its broader reflation strategy, with the long-term goal of building a more integrated national market and putting the deflation cycle firmly behind it.