Nomura: May PPI rises to 3.9% but driven by supply; expectations for RRR and rate cuts postponed to next year

Overview

This report focuses on China's May 2026 inflation data and subsequent outlook. Nomura points out that May CPI YoY remained flat at 1.2%, slightly below market expectations; PPI YoY rose to 3.9%, marking the third consecutive month of positive growth and the highest level since July 2022. Although deflation has ended, this round of inflation rebound is mainly driven by supply-side factors such as global energy shocks and the AI supercycle, rather than improved domestic demand. Based on this, Nomura significantly raises its full-year 2026 PPI and CPI forecasts but warns that this 'imported reflation' may worsen terms of trade and squeeze domestic producers and consumers. On the policy front, although Beijing is expected to continue maintaining a loose tone and increase fiscal spending, Nomura has postponed expectations for RRR and rate cuts to next year due to already ample market liquidity and low government bond yields.

Core views

CPI stabilizes but shows clear structural divergence. May CPI YoY at 1.2% was flat MoM and slightly below the market consensus of 1.3%. Energy prices were the main support, with gasoline prices rising 23.5% YoY, contributing more than half to the overall CPI. However, food prices remained a significant drag; pork prices fell 16.1% YoY, and their continued weakness after hitting a 16-year low reflects ample supply and weak demand. Core CPI (excluding food and energy) eased slightly to 1.1%; weakening service prices offset the mild support from consumer electronics due to chip price hikes. Although the rise in gold-related commodity prices narrowed, it still contributed positively to core CPI by about 0.23 percentage points; excluding gold, core CPI would be only around 0.9%. PPI rebounded strongly but was limited to upstream sectors, with downstream sectors still under pressure. The 3.9% YoY rise in May PPI came almost entirely from upstream industries, with mining and raw material industries rising 15.8% and 9.2% respectively. Specifically, industries such as oil and gas extraction, non-ferrous metal mining and smelting benefited from the global energy crisis and AI demand, making huge contributions to PPI. Estimates suggest that energy and AI-related materials alone pulled PPI up by about 3.96 percentage points; excluding these two factors, PPI would actually remain negative. In contrast, downstream consumer goods manufacturing PPI remained at -0.8%, indicating that cost pressures have not yet been effectively transmitted to terminal consumption, the foundation of inflation is not broad-based, and the market should be cautious about this strong reading. Inflation forecasts significantly revised upward, but the nature is 'bad inflation'. Given soaring oil prices and the sustained impact of the AI supercycle, Nomura raised its full-year 2026 PPI forecast from 1.0% to 2.5% and the CPI forecast from 0.6% to 0.9%. For June, CPI is expected to remain at 1.2%, while PPI is expected to rise further to 4.7%. The report emphasizes that as a net importer of energy and chips, China faces worsening terms of trade due to this externally driven reflation, which cannot solve economic difficulties and may instead suppress already weak household consumption and damage industrial production due to disruptions in raw material supplies. Window for monetary easing shifts later. Although fundamentals still require policy support and Beijing is expected to maintain loose monetary policy and increase fiscal spending to boost domestic demand, the short-term operational pace has changed. Considering that market liquidity is already very ample and Chinese government bond yields continue to fall, the marginal utility of further releasing liquidity is diminishing. Nomura has postponed its predictions for RRR and rate cuts to next year.

Analysis framework

The report adopts a refined 'inflation contribution decomposition' method, looking beyond total changes to quantify the specific pull of each component (such as energy, food, AI materials, gold) on CPI and PPI to identify the true drivers of inflation. For example, calculating PPI growth excluding energy and AI materials reveals underlying structural deflationary pressure beneath superficial prosperity. Simultaneously, the analysis framework incorporates the logic of 'upstream-downstream transmission along the industrial chain'. By comparing price trends between upstream mining/raw materials and downstream consumer goods manufacturing, it assesses cost pass-through capabilities and demand absorption. When upstream surges while downstream contracts, it is judged as a supply shock rather than demand pull, which is crucial for evaluating corporate profitability and policy responses. Furthermore, the report introduces a 'terms of trade' perspective to analyze imported inflation faced by open economies. Examining domestic price changes against the backdrop of global commodity cycles (such as Strait of Hormuz blockades or the AI chip supercycle), it distinguishes between 'good inflation' stemming from internal demand improvement and 'bad inflation' caused by external cost pushes, thereby more accurately predicting the scope and timing of macro policies.

Methodology notes

• Macroeconomic frameworkVolume-price decomposition

  Inflation Contribution Decomposition and Base Effect Analysis

  The report does not just focus on CPI/PPI YoY readings but precisely calculates the percentage point contribution of each细分 industry (such as gasoline, pork, non-ferrous smelting) to the total index. This method strips away false high growth caused by low bases, identifies core factors truly driving price changes, and helps investors see whether inflation is broadly overheated or subject to local supply disturbances.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Upstream-Downstream Price Spread Analysis

  By comparing the difference in PPI trends between upstream resources and downstream consumer goods, it judges whether cost transmission is smooth. When upstream surges while downstream is sluggish, it indicates insufficient terminal demand, squeezing midstream manufacturing profits. This is a key leading indicator for judging the quality of industrial enterprise profits and the sustainability of inflation.

• Macroeconomic framework

  Terms of Trade and Imported Inflation Analysis

  For economies highly dependent on imports of energy and key components, rising global commodity prices push up domestic PPI but also imply a transfer of national income abroad (worsening terms of trade). The report据此 distinguishes between 'demand-pull' and 'cost-push' inflation, pointing out that the latter will instead suppress domestic real purchasing power and limit the space for policy easing.

Key data

• May CPI YoY1.2%Flat vs April, slightly below market consensus of 1.3% and Nomura's expectation of 1.4%
• May PPI YoY3.9%Higher than April's 2.8%, a new high since July 2022, in line with market expectations
• May Core CPI YoY1.1%Down 0.1 percentage points from April; excluding gold impact, actual value is around 0.9%
• May Pork Prices YoY-16.1%Decline widened compared to April, dragging CPI down by 0.31 percentage points
• Pull on PPI from Energy and AI Materials3.96ppTogether they accounted for the vast majority of May PPI gains; excluding them, PPI is negative
• 2026 Full-Year PPI Forecast2.5%Significantly raised; previous forecast was 1.0%
• 2026 Full-Year CPI Forecast0.9%Raised; previous forecast was 0.6%
• June PPI Forecast4.7%Expected to rise further MoM, influenced by oil price transmission and low base effects

Impact & implications

The report believes that the current inflation rebound is not a typical signal of economic recovery for China, but rather a supply shock with contractionary effects. As China is a net importer of energy and chips, rising external prices lead to worsening terms of trade, essentially transferring domestic wealth to overseas resource-exporting countries. This puts pressure on the macro-level balance of payments and micro-economically squeezes the real incomes of most domestic producers and consumers. For policymakers, this means traditional counter-cyclical adjustments face a dilemma: on one hand, weak domestic demand still needs support; on the other hand, imported inflation limits the space for significant monetary easing. Therefore, although fiscal policy发力 remains the main theme, the pace of monetary policy will be more prudent, relying more on revitalizing existing liquidity rather than large-scale injection of funds in the short term. For market participants, caution is needed against mistakenly equating the PPI rebound with improved corporate profits; downstream manufacturing may face more severe cost pressures during this phase.

Risks

• Global energy supply disruptions last longer than expected, leading to失控 imported inflation and severely squeezing the domestic real economy
• Long-term weakness in pork prices coupled with lackluster consumer demand could cause core inflation to remain below desirable levels
• The AI supercycle pushes up costs for tech products; if downstream sectors cannot pass on costs, it may suppress consumer electronics consumption and related manufacturing investment
• Worsening terms of trade exacerbate balance of payments pressures, limiting the space for macro-control policies

What to watch

• Verification of June inflation data: Focus on whether CPI remains at 1.2% and PPI rises to 4.7% as expected
• Global crude oil price trends and changes in the situation in the Strait of Hormuz and their transmission to domestic refined oil prices
• Rising chip prices and their sustained impact on the PPI of computer, communication, and other electronic equipment manufacturing
• Progress in pork capacity reduction and high-frequency data on MARA pig slaughter volumes
• Actual timing of the opening window for central bank RRR and rate cuts, and the trend of government bond yields