China’s wholesale prices surged at their fastest pace in nearly four years in May, driven by the twin forces of the Iran war’s disruption to global commodity flows and an artificial intelligence investment boom pushing up demand for semiconductors and tech equipment — while consumer inflation came in below forecasts, highlighting the divergence between rising production costs and subdued household spending.
The producer price index jumped 3.9 per cent from a year ago, according to data released by China’s National Bureau of Statistics on Wednesday — the highest reading since July 2022, ahead of economists’ forecasts of 3.8 per cent and significantly above the 2.8 per cent recorded in April. Wholesale prices had returned to growth in March after China’s longest deflationary streak in decades, as the input cost surge from the Middle East conflict began feeding through the supply chain.
The Iran war has been the dominant driver of commodity price inflation globally, throttling traffic through the Strait of Hormuz and disrupting energy and raw material flows to the world’s largest manufacturing economy. China has cushioned the worst of the energy shock through strategic oil stockpiles and a diversified renewable energy base, and has trimmed crude imports by nearly 20 per cent since the conflict began, according to official customs data compiled by Wind Information — a move that has also helped prevent global oil prices from trading even higher.
Alongside the commodity shock, growing demand for artificial intelligence computing power has pushed up prices for tech equipment and semiconductors, adding a second distinct inflationary force to China’s wholesale economy.
Consumer prices told a different story. CPI rose just 1.2 per cent in May from a year earlier, missing Reuters poll estimates of 1.3 per cent, and fell 0.1 per cent on a month-on-month basis from April. Core inflation, stripping out volatile food and energy prices, grew 1.1 per cent — edging down from 1.2 per cent the previous month.
The gap between rising production costs and weak consumer spending is drawing warnings from economists about squeezed corporate margins and a fragile domestic recovery. “Consumers in China are keeping a tight fist around their hard-earned renminbi,” said Frederic Neumann, chief Asia economist at HSBC Bank, pointing to a high household saving rate depressing spending at a moment when China urgently needs new economic growth drivers beyond exports.
China’s export performance remained resilient, growing 19.4 per cent from a year earlier in US dollar terms in May — the largest jump in three months — supported by surging international demand for renewable energy and AI-related goods.
There are tentative signs of a revival in luxury consumption, with earnings from brands including Ralph Lauren and LVMH indicating recovering appetite for high-end products. But economists cautioned against reading too much into the trend. “It would be premature to generalise the recent improvement as evidence of a broad-based recovery in consumer sentiment,” said Neo Wang, lead China economist at Evercore ISI, citing a persistent property market slump and weak jobs market as structural headwinds that early luxury data cannot overcome.
