China's producer price index has reached its highest level in nearly four years, with factory inflation surging to 3.9% year-on-year in May, according to National Bureau of Statistics data. This reading exceeded the 3.8% forecast in a Reuters poll and marked a significant acceleration from the 2.8% rise recorded in April. 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 for the first time since July 2022. As reported by Reuters, this significant increase in producer prices reflects mounting cost pressures across the Chinese economy, with the PPI increasing 0.5% month-on-month, less than the 1.7% rise in April. The producer price index rose for a third straight month in May, marking the longest stretch of inflationary pressure since the deflationary period ended.
Energy prices have soared significantly since the United States and Israel launched attacks on Iran in late February, creating substantial cost pressures across Chinese industries. Domestic gasoline prices rose 23.5% from a year earlier, while gasoline and diesel consumption dropped 13% year-on-year in May after falling by around 16% the previous month, according to OilChem data. The effective closure of the Strait of Hormuz continues to disrupt oil and gas flows from the Gulf, with resumption of flows expected to take time even after the waterway reopens. Stronger demand for computing power contributed to the PPI increase, with NBS pointing to rising prices in non-ferrous metal smelting and rolling processing and electronic equipment manufacturing sectors. Since the start of the Iran war, Beijing has lifted diesel retail prices, adding to the overall cost burden on manufacturers. According to China's National Bureau of Statistics, industrial production goods prices surged 5.2% last month from a year ago, with energy prices rising 15.8%, raw materials up 9.2%, and manufacturing increasing 2.3%.
Consumer price inflation showed more moderate increases, with core CPI, which excludes volatile food and fuel prices, rising 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. Food prices were down 1.7% on year, with pork prices dropping 16.1%, while domestic car sales have slumped with vehicles sold dropping 22.3% in May and 19.7% in the first five months, according to China Passenger Car Association data. The sustained inflationary momentum has created additional headwinds for Chinese equities, with the Shanghai Composite falling 0.42% to 3,993.23 points and the Shenzhen Component Index closing 2% lower at 14,954.1 points. As per ING chief economist Lynn Song, 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.
The Middle East war's impact on global supply chains is creating widespread inflationary pressures across major economies. Producer prices in Japan also reached the highest level in three years and two months, with the Bank of Japan announcing that the corporate price index (PPI) rose 6.3% last month compared to the same period last year, exceeding the market forecast of 5.6%. The Bank of Japan predicted this will lead to future consumer price increases, with an official noting that "the price increase is spreading to materials that are in the middle stage (of the supply chain)." In the United States, consumer prices are already showing the aftermath of the Middle East war, with CPI rising 3.8% from a year earlier in April, the highest in three years since May 2023. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a rate hike in September this year has risen to 40%, and the possibility of a rate hike by December is 75%. The U.S. Federal Reserve's monetary policy, which was expected to cut its benchmark interest rate before the war, has turned sharply toward rate increases within this year.
