Nomura Raises China Inflation Forecast: Oil Prices and Chips Drive PPI/CPI

Overview

Nomura released its latest macroeconomic outlook, significantly raising China's inflation forecast for 2026 due to new highs in global crude oil prices and soaring chip prices driven by the AI super-cycle. The report raised the full-year PPI YoY growth forecast from 1.0% to 2.5%, and the CPI YoY growth forecast from 0.6% to 0.9%. Although the rise in inflation readings marks the end of deflation, the report emphasizes this is entirely driven by external supply shocks ('import-driven re-inflation'), while domestic consumer demand, real estate, and service sector prices remain weak. This structural divergence implies worsening macroeconomic terms of trade, which may further squeeze profits for domestic producers and real purchasing power for residents, constraining the pace of policy easing.

Core views

The upward revision at the PPI level mainly stems from two supply shocks. First, the global surge in oil prices, with the Brent crude annual average assumption revised up to $93.9/barrel (YoY +35.9%). The oil and gas extraction, chemical, and related industries account for about 14% of the PPI basket, contributing 1.9 percentage points to the increase in May, explaining nearly half of the MoM PPI YoY change that month, and the price transmission speed this round was faster than during the 2022 Russia-Ukraine conflict. Second, the chip price hike triggered by the AI super-cycle. DRAM and NAND flash spot prices surged YoY by 663% and 110% respectively in Q1 2026. Combined with high-end CPU capacity crowding out, this pushed the Computer and Communication Equipment Manufacturing PPI positive, expected to boost the full-year PPI by about 0.56 percentage points. Additionally, non-ferrous metals and new energy raw material prices provided extra support. The CPI revision is the result of PPI transmission downstream, but pricing segments based on domestic demand remain sluggish. Expected retail price increases for refined petroleum products are projected to pull up full-year CPI by 0.3 percentage points; electronic products like phones and computers were raised due to surging chip costs, expected to further pull up CPI by 0.3 percentage points. However, if these two input factors are excluded, core CPI is only around 0.3%, showing limited improvement compared to 0.0% in 2025. Pork prices fell to their lowest point since 2016 with structurally damaged demand; rents continued deflating following real estate adjustments; and the labor substitution effect brought by AI also suppressed service prices. This indicates that the current price recovery is not a signal of demand recovery. Regarding macroeconomic impact, the report believes this externally-driven re-inflation cannot solve the deep-seated problems of China's economy. As a net importer of energy and chips, price increases lead to worsened terms of trade, which may contract the balance of payments macroeconomically and squeeze the interests of most domestic enterprises and consumers. Household consumption has been dragged down by the phase-out of trade-in policies and weak real estate; supply-driven inflation may further suppress actual demand. Regarding policy response, although Beijing is expected to maintain an accommodative tone and increase fiscal spending, given ample market liquidity and declining government bond yields, the timing for RRR cuts and rate cuts has been postponed to 2027.

Analysis framework

The report adopted a typical 'Supply-side driven attribution' analysis method, decomposing inflation into external input factors and internal demand factors. The analytical thread first tracks price movements in global commodities (crude oil, copper) and tech hardware (storage chips, SoCs), combined with the weight of various industries in the PPI basket, quantitatively calculating their direct pull on industrial product prices. Secondly, through industrial chain transmission mechanisms, it assesses the penetration rate of upstream price hikes on downstream consumer goods (fuel, phones, computers) retail prices. Finally, through an 'exclusion method', stripping out these supply shock items from overall CPI to observe core price trends reflecting real domestic demand. This method effectively distinguishes between 'cost-push inflation' and 'demand-pull inflation', avoiding being misled by surface data. In specific calculations, the institution also introduced a historical comparison perspective, comparing the oil price transmission speed of this round with the period of the 2022 Russia-Ukraine conflict, finding that transmission is currently much faster, thereby correcting the elasticity coefficient of the forecasting model. At the same time, regarding the non-linear characteristics of the refined oil product pricing mechanism (i.e., the domestic adjustment coefficient decreases after international oil prices exceed 80 USD, capped above 130 USD), a dedicated institutional correction was made to ensure the accuracy of the CPI energy component forecast.

Methodology notes

• Macroeconomic framework

  Imported Inflation Attribution Decomposition

  Decomposes overall inflation into external supply shocks (such as oil prices, chips) and internal demand drivers. This report quantitatively separates the contribution of 'imported re-inflation' by calculating the weight of each import-sensitive industry in the price index and its price elasticity, thereby determining whether the rise in prices represents substantial improvement in domestic demand.

• Industry/Industrial Analysis FrameworkSupply Chain Upstream-Midstream-Downstream Transmission

  Price Transmission Mechanism from PPI to CPI

  Analyzes how price hikes in upstream industrial goods transmit along the supply chain to end-consumer products. The report specifically calculates the lag and magnitude of two transmission paths: crude oil → refined oil products, and chips → smartphones/computers, noting that the speed of transmission this time has accelerated, but due to weak terminal demand, some costs may be absorbed by corporate profits rather than fully passed on.

• Macroeconomic framework

  Trade Conditions (Terms of Trade) Effect Analysis

  Focuses on the relative changes in a country's export prices versus import prices. The report points out that as a net importer of energy and chips, when prices of these two key imports surge sharply, terms of trade deteriorate, equivalent to national income transferring outward, which constitutes a contractionary effect on total domestic demand and the balance of payments. This is a key macroeconomic logic for understanding why 'inflation rises but the economy does not heat up'.

• Macroeconomic framework

  Non-linear Constraints of Administrative Pricing Mechanisms

  When forecasting prices of regulated commodities, one cannot simply linearly extrapolate international prices. The report applies the 'ceiling' rule in China's refined oil product pricing mechanism in detail (when international oil prices > $130, domestic retail prices stop increasing). This institutional friction artificially compresses the increase in the CPI energy component in high oil price environments, with losses borne by fiscal authorities or state-owned enterprises.

Key data

• 2026 PPI YoY Forecast2.5%Significantly adjusted up by 1.5 percentage points from previous forecast of 1.0%
• 2026 CPI YoY Forecast0.9%Adjusted up by 0.3 percentage points from previous forecast of 0.6%
• Brent Crude 2026 Average Price Assumption93.9 USD/barrelYear-over-year growth of 35.9%, previously assumed at 88.3 USD/barrel
• May PPI YoY3.9%Oil-related industries contributed 1.9 percentage points, non-ferrous metals contributed 1.8 percentage points
• DRAM Spot Price Q1 YoY Increase663.2%Due to AI server demand crowding out ordinary storage capacity
• Core CPI Excluding Oil and Chips Forecast0.3%Reflecting that the domestic demand pricing component remains extremely weak
• Pork PriceNew Low Since 2016-15.2% YoY in April, structural contraction in catering and construction site demand

Impact & implications

For the macroeconomy, the nature of this inflation recovery is 'bad inflation' rather than 'good inflation'. It stems from rising import costs rather than resident income growth. Not only can it not form a positive 'income-consumption' loop, but it also produces a net contractionary effect on the national economy by worsening terms of trade. For policymakers, this means there is limited space to stimulate inflation solely through monetary easing, because RRR cuts and rate cuts may exacerbate exchange rate pressure and capital outflow risks, so the timing of easing was forced to move back. For market entities, upstream resource products and technology hardware segments with pricing power benefit in the short term, but mid-to-downstream manufacturing enterprises and consumer companies facing the public will face double squeezing of 'rising costs and weak demand', making profit margin recovery more difficult.

Risks

• If global oil prices break through $130/barrel triggering domestic refined oil product price limits, fiscal subsidy pressure may exceed expectations
• If chip price hikes driven by AI last too long, they may have a significant inhibitory effect on downstream consumer electronics sales
• Input-driven inflation combined with weak domestic demand may exacerbate business difficulties and employment market pressure
• Prolonged low pork prices may cause pig farmers to over-liquidate capacity, leading to another new round of severe volatility

What to watch

• NDRC follow-up refined oil product price adjustment windows and whether regulatory measures will be initiated
• Results of global memory chip contract price negotiations in Q2 and spot price trends
• Whether the Ministry of Finance will issue special subsidy policies for refineries
• Changes in Ministry of Agriculture and Rural Affairs breeding sow inventory and execution of stockpiling policies
• Actual implementation timing of central bank RRR cuts and rate cuts whether they are further delayed