Oil shock pushes China’s factory inflation to highest level since 2022

Rising oil prices are pushing up costs for Chinese manufacturers, but households are still reluctant to spend. The divergence was evident in September, when producer inflation accelerated to its highest level since June 2022 while consumer inflation remained below market expectations.

The producer price index (PPI) rose 5 per cent year-on-year, up from 3.8 per cent in August and above the 4.5 per cent increase forecast by economists in a Reuters poll, according to data released by the National Bureau of Statistics on Wednesday. It was the fastest increase since June 2022.

The acceleration reflects mounting pressure on manufacturers from higher energy and raw material costs amid supply disruptions linked to the conflict in the Middle East. However, the increase in factory prices has yet to translate into a comparable rise in consumer inflation, highlighting the uneven nature of China’s economic recovery.

The consumer price index (CPI) rose 0.9 per cent year-on-year in September, compared with 0.8 per cent in August. The increase was below economists’ expectations of 1 per cent. On a month-on-month basis, consumer prices rose 0.2 per cent, slowing from a 0.4 per cent increase in August and missing forecasts for a 0.3 per cent gain.

Oil and commodity prices drive factory inflation

Higher oil and commodity prices have added to production costs as transport disruptions, adverse weather and geopolitical tensions affect global supply chains.

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Prices rose particularly sharply in fuel processing, chemicals and non-ferrous metals, reflecting the impact of higher commodity costs on industrial supply chains, Nguyen Hoang Nam, China economist at Capital Economics, told Reuters.

Nam expects producer price pressures to ease next year, suggesting the current acceleration may not necessarily translate into a sustained increase in inflation.

The rise in producer prices matters because manufacturers must decide whether to absorb higher input costs, potentially squeezing profit margins, or pass them on to customers. In China, weak domestic demand is limiting their ability to raise prices without risking a loss of sales.

Why China’s consumers remain cautious

The relatively modest increase in consumer prices points to continued weakness in household spending despite government efforts to support economic activity.

Gasoline prices rose 16.6 per cent year-on-year in September, contributing about 0.47 percentage points to headline consumer inflation, according to the statistics agency. However, underlying price pressures remained subdued.

Core CPI, which excludes volatile food and energy prices, increased 1 per cent year-on-year, unchanged from August.

The divergence between producer and consumer prices highlights a challenge for policymakers. Higher industrial prices can signal improving pricing power for businesses, but a durable recovery also requires stronger consumption, rising incomes and improved confidence among households and private-sector firms.

Zhou Hao, chief economist at Guotai Junan International, told Reuters that a key question is whether stronger industrial momentum can feed through into employment, income growth and consumer confidence.

If that transmission improves, the gap between producer and consumer prices could narrow as demand strengthens, creating the conditions for a more balanced recovery in 2027, Zhou said.

Beijing steps up economic support

China has introduced additional measures to support growth as weak domestic demand and fragile private-sector confidence continue to complicate its recovery.

On October 9, Beijing approved an additional 550 billion yuan, or about $82.15 billion, in unused local government bond quota for infrastructure and other spending, Reuters reported. The move adds to measures announced in September, including mortgage subsidies intended to support the property market and household demand.

The effectiveness of these measures will depend partly on whether additional public spending and easier financing conditions translate into stronger private investment and consumer expenditure.

China’s recovery has continued to face an imbalance between industrial activity and domestic consumption. Factory output and exports can support growth, but persistently weak household demand limits the ability of businesses to pass on higher costs and can leave the economy vulnerable to external shocks.

China’s benchmark CSI300 index slipped 0.1 per cent on Wednesday, while the Shanghai Composite rose 0.1 per cent, indicating a muted market reaction to the data.