BEIJING:China’s producer prices rose for a third straight month in May to the highest since July 2022, while consumer prices stayed elevated as global energy prices piled cost pressures on manufacturers and drove up costs of living for households.
Cost pressures from the Iran war could squeeze corporate profits and further subdue domestic consumption, although global AI-related demand provided a boost for some sectors.
For manufacturers not in advanced manufacturing, passing higher input prices to consumers could remain difficult, highlighting headwinds policymakers face in their efforts to support the job market and bolster still-soft domestic demand.
The producer price index (PPI) rose 3.9% from a year earlier, National Bureau of Statistics (NBS)data showed yesterday, above a 3.8% forecast in a Reuters poll and 2.8% rise in April.
“In industries where demand is solid, such as AI, firms can pass on higher input cost and even charge end consumers a markup,” said Xu Tianchen, senior economist at the Economist Intelligence Unit. That is not the case for industries such as automotives, he said.
Stronger demand for computing power contributed to an increase in the PPI, NBS said in a statement, pointing to rising prices in non-ferrous metal smelting and rolling processing, and electronic equipment manufacturing sectors.
The PPI increased 0.5% month-on-month, less than a 1.7% rise in April.
Energy prices have soared since the US and Israel launched attacks on Iran in late February, and cost pressures are likely to persist as the effective closure of the Strait of Hormuz continues to disrupt oil and gas flows from the Gulf. Resumption of the flows will take time even after the waterway reopens.
The energy-induced price shock has helped lift China’s producer prices out of a years-long deflationary streak, as the year-on-year PPI reading turned positive in March for the first time since September 2022. Policy efforts to raise prices, including a government campaign to curb corporate price-cutting, had previously only eased deflation.
But the mismatch between supply and demand in China’s economy may worsen as rising costs of living dampen already lukewarm household appetite for discretionary spending.
Consumer prices in May rose 1.2% from a year earlier mainly on rising gasoline, gold jewellery and services prices, according to the statistics bureau. The gauge recorded a 1.2% gain in April and economists had expected a 1.3% rise for May.
Food prices were down 1.7% on year, with pork prices dropping 16.1%. Domestic gasoline prices dropped month-on-month, but they rose 23.5% from a year earlier.
“Food and property prices are helping suppress headline inflation for now. But rising prices more broadly suggest we’re moving from deflation into a low inflation environment,” said Lynn Song, chief economist of Greater China for ING.
Song does not expect stronger price momentum to lead to higher wages, citing elevated youth unemployment and workers concerns’ for job security amid AI advancements.
ANZ analysts revised their PPI forecast for the year to 2% from 0.8% following the data, but left their CPI estimate unchanged at 1.2%, citing limited passthrough from upstream to downstream sectors.
Since the start of the Iran war, Beijing has lifted diesel retail prices. Gasoline and diesel consumption dropped 13% year-on-year in May after falling by around 16% the previous month, OilChem data showed.
Domestic car sales have slumped, with the number of vehicles sold dropping 22.3% in May and 19.7% in the first five months, China Passenger Car Association data showed.
Core CPI, which excludes volatile food and fuel prices, rose 1.1% from a year earlier.
On a monthly basis, CPI edged down 0.1%, matching expectations and compared with a 0.3% rise in April.
“Looking ahead, the main source of uncertainty surrounding the outlook stems from developments in the Middle East and global energy markets,” wrote Abhijit Surya, senior Apac economist of Capital Economics. “However, in our baseline scenario, in which supply disruptions gradually abate, consumer price inflation should subside before long.” – Reuters
