As China’s disinflation fades, inflation risks may rise globally

Even prior to the conflict in Iran and the heightened global inflation focus, the inflation factor few were talking about—but one that could have profound global implications—was China’s “anti‑involution” drive. Announced in July 2025, the policy aims to curb destructive domestic competition in a variety of industries by driving capacity consolidation. If successful, it would curb price wars, encourage consolidation in some sectors, and boost profit margins, creating upward pressure on prices.

Over time, the result could be that the year‑over‑year change in China’s producer price index (PPI) will remain positive through 2026 after running in negative territory from late 2022 into early 2026. The oil price jump resulting from the Middle East conflict helped flip the change in PPI into positive territory in March 2026 given the close correlation of Chinese PPI and oil prices.

On a global level, such a shift matters because it would remove a disinflationary tailwind that has helped central bankers control inflation in recent years. Against this backdrop, it is critical to monitor the anti‑involution policy’s effectiveness. To do so, we track the performance of baskets, or custom indexes, of Asian stocks that are most exposed to the effectiveness of anti‑involution policies as well as the prices of key commodities in China.

Successful capacity consolidation effort in 2015–2016

China carried out a similar capacity consolidation push in 2015–2016 after more than three years of negative monthly PPI readings. This effort was very successful in raising commodity prices in targeted areas such as steel and coal. The key difference between now and 10 years ago is the Chinese government at that point was also stimulating demand, which appears unlikely today. Also, the capacity cuts in 2015 were much more blunt than today’s actions, which are more controlled.

The effects of the latest anti‑involution campaign are evident in the country’s fixed assets investment, which declined in the second half of last year before rebounding at the beginning of 2026.

Recent upturn in fixed assets investment

(Fig. 1) After falling in late 2025, FAI rose in early 2026

As of February 28, 2026.
Source: Bloomberg Finance L.P.

close

Tight link between industrial profits and PPI

We believe rising prices of this basket of Asian stocks will be the first signal of sustained higher profits and commodity prices stemming from the anti‑involution campaign. Chinese industrial profits and PPI have been highly correlated. We think that the equity prices are signaling higher profits, leading an upward turn in the underlying commodity prices and, finally, Chinese PPI soon after.

Industrial profits could signal PPI rise

(Fig. 2) Profits in industry and PPI have been correlated

As of March 31, 2026.
Source: Bloomberg Finance L.P. Shaded areas indicate time periods for which National Bureau of Statistics of China did not provide data.

close

Affected equity prices have turned upward

(Fig. 3) But Asian EV and property sectors have lagged

As of April 14, 2026
Source: Bloomberg Finance L.P.
* Vertical axis scale represents change from 100 on the start date. For example, 120 is a 20% increase, and 80 is a 20% decrease.

close

Tracking custom indexes of most‑affected Asian stocks

With the help of T. Rowe Price’s global equity analysts, we created baskets of Asian stocks to track the specific sectors directly targeted by anti‑involution as well as related industries likely to feel knock‑on effects.

The targeted industries basket made a strong move upward following the mid‑2025 anti‑involution announcement from the Chinese government before plateauing in the last quarter of the year. It resumed its gains in January and February 2026. The EV‑related equities, however, have been slow to respond because of their longer production cycles and significant export exposure. Also, capacity consolidation within EV supply chains and industries such as steel has been less advanced.

We believe the positive impulse for equities in the targeted industries will continue as, more importantly, the disinflationary force from China fades over the course of 2026.

The Chinese property industry remains weak and is the sector most likely to experience a delayed response to anti‑involution. However, any consolidation among the major players in China’s real estate market could stabilize residential prices as well as equities in the sector.

Factors coalescing to push inflation higher

You could say that President Xi Jinping has been the best Federal Reserve governor in recent years because of the disinflationary impulse that China has exported since 2022 and only be partially joking. However, we think that this disinflationary force is winding down. Even outside of China’s anti‑involution, other factors are coalescing to move inflation higher.

We’ve already been seeing more inflation in 2026 across many factors—with the major exception of housing—and the fading disinflationary impulse from the anti‑involution campaign in China will add to the upward momentum. We believe a prolonged conflict in the Middle East would undoubtedly sustain higher energy prices and exacerbate the global inflation situation, making a central banker’s job even more difficult. This could translate into fewer rate cuts or into hikes from central banks in energy importing areas like Europe.