China Economics: A New High for PPI in this Upcycle

Inflation readings came in mixed in September. PPI surged to a new high of 5.0%YoY, beating expectations by a wide margin while CPI disappointed at 0.9%YoY. Global commodity prices and sluggish domestic demand drove the divergence. The PPI details for September also suggest an ongoing investment-led cyclical stabilization with construction prices warming up. Headline reflation should remain firmly on track, while we grow increasingly mindful of "bad inflation" – downstream sectors could face both cost pressures and soft demand – and risks to inflation outlook. The momentum of AI price upcycle may be moderating, and IF global oil prices normalize, industrial deflation could resurface in 2027. We see policy focus shifting to implementation, and continue to expect no PBoC cut especially with resurging PPI. 2027 remains a likely occasion for any policy pivot.