China’s producer prices turn positive as inflation accelerates due to Iranian oil shock

China’s factory prices rose for the first time in more than three years as consumer inflation slowed in March as oil prices soared as the Iran war transformed global energy markets.

The producer price index rose 0.5% year-on-year, the first increase since September 2022, ending the longest deflationary trend in decades. The PPI for the first quarter decreased by 0.6% compared to the same period last year.

Data released by the National Bureau of Statistics on Friday showed consumer prices rose 1% in March from a year earlier, missing the 1.2% rise expected by economists in a Reuters poll and slowing from February’s 1.3% rise.

Core CPI, which excludes volatile items such as food and energy, rose 1.1% in March compared to the same month last year.

The war between the United States and Iran, now in its sixth week, has sent oil prices soaring after Tehran effectively closed the Strait of Hormuz to most private tankers and the Middle East’s major producers curbed oil production.

international benchmark brent The June contract was trading at $96.7 per barrel on Friday, up 33% since the war began on February 28th. US WTI Crude oil futures for May delivery were $98.5 per barrel, a 47% increase compared to prewar levels.

China, the world’s largest oil importer, faces potential inflationary spillovers, although large strategic reserves and diversified energy sources provide some cushion to the economy.

“China will fare better than its peers in a large but not extreme oil shock, given its energy substitutability and policy flexibility due to low inflation,” said Robin Xin, chief China economist at Morgan Stanley. He expects the country’s PPI to rise by 1.2% and CPI by 0.8% in 2026.

The Wall Street bank cut its forecast for China’s GDP growth this year by 10 basis points to 4.7%, assuming oil prices averaged $110 a barrel in the second quarter before retreating.

China’s real GDP could slow to 4.2% this year if the Middle East conflict continues to worsen and oil prices exceed $150 per barrel into the second quarter, the central bank said. “Even if the strait reopens, oil prices may continue to rise due to delays in supply normalization and inventory rebuilding,” Singh said.

In a sign of growing pressure, China’s Supreme Economic Planning Agency on Tuesday raised retail prices for gasoline and diesel by 420 yuan ($61.18) and 400 yuan per tonne, respectively. Policymakers last month raised prices by 1,160 yuan per tonne to 1,115 yuan per tonne.

Gasoline prices rose 11.1% month-on-month in March, even as the Chinese government sought to curb fuel price increases to soften the blow to consumers from energy-driven inflation. Compared to the same period last year, gas prices increased by 3.8%.

The oil market turmoil could change policymakers’ calculations, as economists warn that input cost shocks could cause “bad inflation” in the economy and further squeeze manufacturers’ already thin profit margins.

Chinese industrial companies saw their profits rise sharply in the first two months of the year, thanks to the Chinese government’s push to curb overcapacity and fierce price competition across sectors.

But Tiancheng Xu, senior economist at the Economist Intelligence Unit, said profitability is likely to come under new pressure in a “cost-push inflation cycle” in which manufacturers absorb some of the upstream price increases.

“This is evidenced by the fact that PPIRM (Purchase Price Index for Raw Materials, Fuel and Power) exceeded PPI, increasing by 0.8% year-on-year,” Xu said.

Although the CPI has risen slightly, it remains well below the 2% threshold that policymakers consider appropriate, leaving the door open for potential monetary easing due to the drag on growth caused by the Iran war, Xu added.

The People’s Bank of China reaffirmed its cautious monetary easing stance at its quarterly meeting last month, cutting its policy rate only once by 10 basis points in 2025.

Yields on China’s 10-year government bonds remained relatively stable, at 1.814% on Friday, despite persistent concerns about soaring oil prices.