China’s inflation rate exceeds April forecast as producer prices rise to three-year high due to Iran war

China’s producer prices rose at the fastest pace in more than three years in April, but consumer inflation also exceeded expectations as commodity prices and holiday spending from the war in Iran had a broad reflationary effect on the economy.

Data released by the Office for National Statistics on Monday showed consumer prices rose 1.2% in April from a year earlier, beating the 0.9% rise expected by economists polled by Reuters and accelerating from a 1% rise in March.

The producer price index rose 2.8% year-on-year, the highest level since July 2022, ahead of economists’ expectations of 1.6% and a sharp acceleration from March’s 0.5%, according to LSEG data. Factory prices rebounded in March after three years of decline, surging after the longest period of deflation in decades ended.

As the Iran war has disrupted traffic in the Strait of Hormuz and disrupted the flow of energy and raw materials, soaring global commodity prices are driving up prices.

According to official data, retail gasoline prices rose 19.3% in April compared to the same month last year, while food prices fell 1.6%, led by lower prices for pork and fresh produce. Core CPI, which excludes volatile food and energy prices, rose 1.2% year-on-year in April, up slightly from March’s 1.1% rise.

Consumer inflation was partially boosted by travel spending due to Qingming, Labor Day, and spring break in some parts of the country.

Consumer sales during the Labor Day long holiday that ended on May 5 also increased by 14.3% year-on-year, according to provisional official statistics, exceeding the 13.7% increase recorded during the Lunar New Year holiday in February.

The global energy shock caused by the closure of the Strait of Hormuz has spread to the entire industrial sector, with non-ferrous metal extraction prices increasing by 38.9% year-on-year, and oil and gas extraction prices increasing by 28.6%.

Oil and coal processing prices rose by 14.2% due to replenishment demand for coal for power generation and increased demand for coal as an alternative energy source from the chemical and metallurgical industries.

NBS chief statistician Dong Lijuan said in a statement on Monday that apart from commodity prices, the growing demand for artificial intelligence computing power also increased producer prices, increasing prices for textile manufacturing and external storage devices, as well as easing price competition among industries.

“After three years of deflationary pressure, these reflationary forces may be welcomed by the Chinese government,” Nomura said. However, the bank said supply-side-driven reflation risks further squeezing corporate profit margins and suppressing household consumption demand.

China’s domestic demand remains weak, with retail sales slowing sharply to 1.7% in March, lower than expected. The real estate recession continues, with investment declining by 11.2% as of March this year, worse than the 9.9% decline in the same period last year.

China, the world’s biggest oil importer, has cushioned the worst of the energy shock with strategic oil reserves and a diverse mix of renewable energy sources, but economists warn there are limits to the buffer as the turmoil drags on.

Chapen Shin, chief China strategist at ANZ Research, expects full-year CPI to be 1.2%. Consumer inflation is expected to remain moderate, but the outlook for PPI will depend on oil prices in the short term and Beijing’s anti-involution policies in the long term, said Chapen Shin, chief China strategist at ANZ Research.

But the country’s overall export growth accelerated last month, rising 14.1% year-on-year, pushing the monthly trade surplus to $84.8 billion and putting the country on track to post a surplus of about $1 trillion for the third consecutive year.

As US President Donald Trump prepares to visit Beijing for a summit, all eyes will be on the strength of China’s exports next week, as its trade surplus with the US has grown to $87.7 billion so far this year.

Chinese President Xi Jinping is expected to host Trump later this week as the two countries seek to stabilize relations strained by tensions over trade, export controls, Taiwan and the war with Iran.

Economists at Goldman Sachs say they expect the Middle East conflict to feature prominently at the summit, as Beijing, which hosted Iranian Foreign Minister Abbas Araghchi last week, has positioned itself as an active mediator in efforts to reopen the Strait of Hormuz.

Lin Song, chief economist for Greater China at ING, said that given the strength of inflation and the strength of exports, policymakers are likely to keep their plans on hold until the second half of this year unless the economy deteriorates sharply, adding that China’s next policy move is likely to be a rate cut rather than a rate hike.