Producer price inflation in China soared to its highest level in four years in June, increasing pressure on manufacturers' profit margins amid weak domestic demand that limits their pricing power.
The Chinese economy currently exhibits a dual-track dynamic; a global export boom driven by artificial intelligence is boosting advanced manufacturing, while persistent weak consumer spending, dwindling investment, and a property slump continue to stifle domestic activity.
Data from the National Bureau of Statistics, released on Thursday, showed that the Producer Price Index (PPI) rose by 4.1 percent year-on-year, marking its highest level since July 2022, which matched expectations from a Reuters survey, marking the fourth consecutive month of increase. The index, which grew by 3.9 percent in May, had broken a years-long trend of price contraction in March following a surge in energy prices in the wake of the Iranian war.
The accelerating growth in factory gate prices is partially attributed to a lower comparison base from the previous year, although analysts noted that weak domestic demand means deflationary pressures have not materially eased yet.
Julian Evans-Pritchard, head of China economics at Capital Economics, stated that “the recent escalation in U.S.-Iranian tensions could impose some renewed upward pressures on inflation in the near term, but this will remain limited to narrow sectors, and inflation is expected to return to around zero once energy supplies normalize.”
According to the National Bureau of Statistics, increases in coal mining, electrical machinery, electronics, and ferrous metals were among the main contributors to the rise in producer prices, while prices in other sectors including alcoholic beverages and auto manufacturing declined.
On a monthly basis, the Producer Price Index fell by 0.3 percent in June, following a sharp drop in global oil prices after a U.S.-Iran agreement on a ceasefire. In contrast, some high-tech and green transition industries, such as virtual reality equipment, wearable devices, and carbon nanomaterials, recorded monthly price gains.
Despite improved prices bolstering profits in some primary production and advanced technology sectors, manufacturers more reliant on the domestic market are struggling to pass elevated costs onto consumers. This landscape highlights the obstacles policymakers face in their efforts to support the labor market and stimulate still-weak domestic demand.
Evidence of the weakening domestic demand was clearly reflected in Chinese auto sales, which fell for the ninth consecutive month in June, prompting automakers to turn to foreign markets.
Consumer price data, released alongside the Producer Price Index, showed some slowing; the consumer price index rose by 1.0 percent last month year-on-year, down from a growth of 1.2 percent in May, and below expectations for a rise of 1.1 percent due to slowing increases in industrial consumer goods prices, including gold jewelry and gasoline.
On a monthly basis, the consumer price index dropped by 0.3 percent, compared to expectations for a decline of 0.2 percent and a decrease of 0.1 percent in May.
The core consumer price index, which excludes volatile food and energy costs, rose by 1.0 percent, the slowest pace since January, while food prices dropped by 1.6 percent year-on-year.
Lin Song, chief economist for Greater China at ING Bank, said: “The data are moving from a stage close to price deflation to low positive inflation. This level of inflation is unlikely to deter the People’s Bank of China from taking monetary policy actions if…”} } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } } }