China Inflation Data Misses Target as U.S. Tariffs Stoke Market Unease

China Inflation Report Disappoints as US-China Trade War Intensifies

On Thursday, April 10, investor attention turned to China as President Trump raised tariffs on Chinese imports to 125%. Ahead of the March data, deflationary pressures had lingered, raising doubts about China achieving its 2025 GDP growth target of around 5%.

Deflationary pressures persisted in March, signaling weak domestic demand. China’s annual inflation rate fell 0.1% in March after sliding 0.7% in February. Economists expected an inflation rate of 0.1%. On a monthly basis, consumer prices slipped 0.4% in March, following a 0.2% fall in February—further evidence of softening demand.

Producer prices also painted a gloomy picture, falling 2.5% year-on-year in March after dropping 2.2% in February. As a leading inflation indicator, falling producer prices suggest producers are cutting prices in response to waning demand, passing cost savings on to customers.

Expert Views on China’s Inflation Trends

Economists noted ongoing deflationary pressures and warned that the US-China trade war would likely exacerbate the situation.

Higher US tariffs could reduce demand for Chinese goods, fueling deflationary pressures. The US-China trade war could also affect consumer confidence and China’s labor market conditions, potentially dampening domestic consumption.

The Market Reaction to China’s Inflation Report

Financial markets reacted swiftly to the March data, which underscored fragility in the demand environment.

Before the inflation data, the Hang Seng Index rallied 2.69% to 20,810 as markets reacted to President Trump’s tariff announcements. However, in response to the March inflation report, the Index briefly rose to a high of 20,910 before falling to a low of 20,739.

On Thursday, April 10, the Index was up 2.61% to 20,794 for the morning session. While weak inflation data pressured sentiment, tariff relief limited the downside in early trade.

In the forex market, the AUD/USD reacted negatively to the data, falling from $0.61209 to a post-report low of $0.61179. Earlier, Trump’s 125% tariff on Chinese imports had sent the AUD/USD pair to a session low of $0.61155.

On April 4, the AUD/USD traded 0.43% lower at $0.61244.

Given China accounts for one-third of Aussie exports, the Aussie remains highly sensitive to China’s economic data and US tariff policies.

What’s Next? Tariffs in Focus

On Wednesday, April 9, President Trump provided market relief, lowering tariffs on non-retaliating countries to a blanket 10% while hiking tariffs on China. However, tariffs on autos, steel, and aluminum remain, with potential implications for inflation, Fed policy, and broader economic sentiment.

Higher tariffs could drive consumer prices higher, supporting a more hawkish Fed rate path. Rising inflation and a more hawkish Fed stance could also weigh on consumer spending, which accounts for over 60% of US GDP.

Risk aversion could intensify if Beijing retaliates. Further countermeasures could drag the AUD/USD pair lower and weigh on demand for Hong Kong and Mainland China-listed stocks.

Discover strategies to navigate this week’s market trends here.