The trajectory of Chinese inflation will largely depend on its sensitivity to U.S. tariffs and its ability to sustain domestic GDP growth through external demand, particularly from key partners like Germany. While U.S. tariffs on China present a challenge, our models indicate that the greater economic threat stems from tariffs imposed on the Eurozone.
Contribution Word Cloud CPI YoY NSA for China, Jan 2025
Subscribers can gain insights into the key drivers influencing Turnleaf’s CPI forecasts by examining our Word Cloud. Each term represents an economic indicator’s relative importance in our CPI model. The size of each word reflects its contribution magnitude to overall inflation predictions, helping subscribers quickly identify the most influential factors. The color coding further clarifies each indicator’s impact direction: blue words represent indicators with a disinflationary effect on CPI, while red words highlight inflationary factors. This Word Cloud enables a quick, visual analysis of the complex landscape of inflationary and disinflationary influences in our forecasting model.
Following Trump’s 2018 imposition of a 25% tariff on Chinese steel, China swiftly reconfigured supply chains, reducing its reliance on the U.S. market. As a result, China’s steel exports to the EU surged 97.5% YoY in 2022, moderating only 0.1% in 2023. Figure 1 illustrates how, in recent years, China’s iron and steel exports have been predominantly directed toward the European Union, while the U.S. has played a diminished role. However, if Trump proceeds with the March 12, 2025, implementation of a new 25% tariff on steel and aluminum imports, the Eurozone will face a predicament similar to China’s seven years ago. Currently, the U.S. accounts for 25% of all EU steel exports, and redirecting trade this time will be far more challenging. With weak industrial demand across the EU and intensified competition from Chinese steel, European producers are likely to face significant headwinds.
Figure 1
Compounding these pressures, the planned 25% tariff on EU auto imports will further strain the already struggling autosector, reducing demand for intermediate parts and precious metals essential to German-Chinese supply chains in the auto industry—an area critical to China’s economic growth. Our models highlight this dynamic, with Germany’s stagnation—evidenced by prolonged weakness in the DAX—continuing to suppress Chinese inflation through tightly linked industrial supply chains. The combination of reduced demand for German automobiles and declining industrial activity in Europe will weaken Germany’s economic performance and, in turn, its trade relationship with China.
This trend is further underscored by a softening global steel market, where U.S. tariffs have redirected competition, worsening structural issues in European manufacturing and driving an accumulation of Chinese steel inventories (Figure 2).
Additionally, falling shipping costs between Northern Europe and the U.S. (Figure 3)—likely influenced by election-related uncertainty and broader economic stagnation—signal further weakening in external demand for China as Europe struggles with external demand itself.
Figure 3
Despite softening growth, a one-off surge in inflationary pressures emerged in January 2025, driven by the unexpected box office success of the Ne Zha 2 movie, which generated $1.95 billion in revenue (Figure 4). However, this spike is temporary, and our models suggest that inflationary pressures will ease in the coming months as uncertainty continues to weigh on Chinese manufacturing.
Figure 4
The trajectory of Chinese inflation remains closely tied to evolving trade policies, particularly the impact of U.S. tariffs on both China and its key external demand sources like Germany. While temporary inflationary spikes—such as the January 2025 box office surge—can emerge from domestic consumption trends, structural disinflationary pressures remain dominant. The weakening of Germany’s industrial sector, exacerbated by tariffs on steel and autos, poses a significant risk to China’s export-driven growth, reinforcing downside risks to inflation. As global supply chains shift and industrial demand stagnates, alternative data—ranging from steel inventory buildups and shipping cost trends to equity market signals—has proven critical in assessing inflationary pressures beyond traditional economic indicators. Given the fluid nature of trade policies, Turnleaf will continue to monitor these high-frequency indicators to provide more accurate and forward-looking inflation forecasts.