China’s inflation split widens as AI, Iran war stir up factory prices

[BEIJING] China’s consumer inflation unexpectedly stalled in May even as factory prices gained at the fastest pace in almost four years, storing up risks for company profits as poor demand at home seals off the economy from a global commodities rally.

The consumer-price index (CPI) climbed 1.2 per cent from a year earlier, rising at the same pace as in the previous month and missing the median estimate of 1.3 per cent in a Bloomberg survey of economists. A 16 per cent plunge in pork prices had a 0.3 percentage-point drag on the CPI, according to data published by the National Bureau of Statistics (NBS) on Wednesday (Jun 10).

Producer inflation (PPI) accelerated to 3.9 per cent compared with a year ago, matching forecasts and up from 2.8 per cent in April. The core CPI, which strips out volatile food and energy prices, surprised by undershooting expectations and increasing 1.1 per cent, slower than its 1.2 per cent gain in April.

The Chinese renminbi erased gains against the US dollar in onshore trading after the data release. The yield on 10-year government bonds held steady at about 1.7 per cent.

“The passthrough to core inflation remains relatively muted,” said Serena Zhou, senior China economist at Mizuho Securities. “I’m more worried about the widening gap between PPI and CPI inflation, as it suggests manufacturers’ ongoing difficulties in passing higher input costs downstream and thus suffering from margin compression.”

A global energy crisis triggered by the war in Iran – along with a boom in investment into artificial intelligence – has revived inflationary pressures among factories in the world’s second-biggest economy.

“The Iran war lifted producer prices, but weak domestic demand prevented pass-through to consumer inflation,” Bloomberg Economics economist David Qu said. “Looking ahead, we expect PPI inflation to remain relatively elevated, though lower oil prices should slow the pace of increase. CPI inflation should stay soft.”

But many consumer-facing firms are struggling to pass on higher raw material costs to buyers, which is hurting their profit margins. Years of weak demand and excessive supply have contributed to bruising competition among Chinese industrial firms that’s keeping a lid on consumer prices.

As a result, the gap between PPI and CPI grew last month to the widest since June 2022.

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That is complicating China’s path to reflation, as price trends diverge between sectors exposed to weak domestic demand and others more affected by the higher cost of oil, chips and metals. The upshot is that even with China on track to exit economy-wide deflation this quarter, the turnaround probably won’t lead to a broader improvement in profitability and wages across all industries.

Within the CPI, the cost of fuel for vehicles soared 21 per cent in May from a year ago, accelerating from the 17 per cent gain in April. Acting as an offset, prices of food, alcohol and tobacco dropped, extending their decline slightly to 0.9 per cent.

Pork prices have been falling for almost two years now, as the pig farming industry struggles to clear overcapacity.

Other consumer items – ranging from clothes and housing to education, entertainment and health services – showed inflation flatlining or decelerating. The category of “miscellaneous goods and services,” which includes gold jewellery, also saw price increases slow after surging since late 2025, suggesting a fading boost from the bullion rally.

“Food and property prices are helping suppress headline inflation for now,” said Lynn Song, chief economist for Greater China at ING Bank. “But rising prices more broadly suggest we’re moving from deflation into a low inflation environment.”

The global AI boom is meanwhile feeding through to prices as chips and metals used for building data centres are sharply rising in cost. It’s also stoking demand for Chinese electronics from chips to printed circuit boards.

As a result of more expensive components, prices for communication equipment under the CPI – including smartphones – climbed 7 per cent, accelerating from 4 per cent in April. Home appliances prices also picked up.

“The acceleration of electrification, the deep integration of artificial intelligence across various sectors, and the growing demand for computing power have driven up prices in industries such as nonferrous metals, electrical machinery, and computers,” NBS statistician Dong Lijuan said in a statement accompanying the figures.

Under the PPI, the higher costs of energy, chips and non-ferrous metals such as copper and aluminium are driving the biggest gains.

Output prices for China’s miners and refiners of non-ferrous metals, as well as the producers of coal, natural gas and coal, extended their double-digit increases. Prices within the electronics industry rose 2.1 per cent, the fastest increase in data going back to 1996.

China’s footprint in global trade suggests higher charges ahead for global buyers.

Already, the oil shock and the AI boom have pushed China’s export prices out of a three-year streak of declines. Overall export prices rose 5 per cent in April from a year ago, their biggest gain since April 2023.

Still, the increases were concentrated in global commodities like crude oil, metals and semiconductors, suggesting they remain slow in reaching the downstream sectors.

“Looking ahead, the main source of uncertainty surrounding the outlook stems from developments in the Middle East and global energy markets，” said Abhijit Surya, senior APAC economist at Capital Economics. “However, in our baseline scenario, in which supply disruptions gradually abate, consumer price inflation should subside before long.”