China's February inflation data exceeded expectations. How far is the market from a full inflation recovery?

1. What happened? February CPI and PPI data both exceeded expectations

February inflation data is out, and both CPI and PPI performed better than market expectations.

CPI increased by 1.3% year-over-year, compared to the expected 0.9%. This is a significant jump from last month’s 0.2%, marking the highest point since February 2023. The month-over-month increase was 1.0%, the strongest in nearly two years. More notably, core CPI (excluding food and energy) rose by 1.8% year-over-year, reaching a new high since February 2019.

PPI decreased by 0.9% year-over-year, still negative but the decline narrowed considerably from last month’s -1.4%, and it also beat market expectations of -1.2%. Month-over-month, PPI has increased for five consecutive months, rising by 0.4%.

The data looks good, but breaking it down makes it clear that the surprise was mainly due to three factors coinciding.

First, the offset effect of the Spring Festival was very obvious. This year’s holiday lasted 9 days, all falling in late February, leading to a surge in travel and cultural tourism demand. Service prices rose by 1.1% month-over-month and 1.6% year-over-year, contributing about 0.75 percentage points to the YoY CPI. Travel prices jumped 14.1% month-over-month, with air tickets, car rentals, travel agencies, and hotels accounting for more than a third of the CPI monthly increase. Food prices also rose by 1.9% due to holiday stocking, but the increase in fresh vegetables was actually weaker than in previous years, indicating that supply was not tight.