A customer buys gold jewelry at a gold store in Hangzhou, Zhejiang Province, China, June 3, 2026.
Cost Photo | Null Photo | Getty Images
China’s wholesale prices rose at the fastest pace in about four years in May due to soaring raw material prices due to the Iran war and an artificial intelligence investment boom, but consumer inflation was lower than expected.
Data released by the Office for National Statistics on Wednesday showed the producer price index rose 3.9% year-on-year, the highest level since July 2022, ahead of economists’ expectations of 3.8% and above April’s 2.8%.
Wholesale prices returned to rise in March as the economy emerged from its longest period of deflation in decades due to soaring input costs stemming from conflict in the Middle East. The Iran war has disrupted traffic in the Strait of Hormuz, disrupting the flow of energy and raw materials.
Factory fuel and electricity purchase prices rose 10% year-on-year in May, widening the rate of increase from 4.4% in April. The cost of non-ferrous metal materials and wires soared by 22%.
Apart from rising commodity costs, increased demand for artificial intelligence computing power has also pushed up wholesale prices, pushing up the prices of high-tech equipment and semiconductors.
“Accelerating the transition to electrification, deepening AI adoption, and surging demand for computing have driven up prices across non-ferrous metals, electrical machinery and computer hardware,” NBS chief statistician Don Lijuan said in a statement on Wednesday. Non-ferrous metal mining led a 36.5% year-over-year increase, while smelting increased by 24%.
Consumer prices rose 1.2% in May from a year earlier, falling short of the 1.3% rise expected by economists polled by Reuters. Consumer inflation fell 0.1% month-on-month from April. Gasoline prices for consumers rose 23.5% from the previous year.
Core CPI, which excludes volatile food and energy prices, rose 1.1% year-on-year in May, slowing slightly from April’s 1.2% rise. Food prices fell by 1.7% from the previous year.
“Inflationary pressures (due to rising energy costs) in the consumption sector are not as strong as domestic demand remains weak,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
The CSI300 index fell by about 1%, and the Hang Seng index fell by 0.8%. China’s 10-year government bond yield was little changed at 1.740%, according to LSEG data.
China has cushioned the worst of the energy shock through strategic oil reserves and a diverse mix of renewable energy sources. The world’s largest oil importer has cut crude oil imports by nearly 20% since the outbreak of the Iran war, limiting global oil prices from rising further, according to official customs data compiled by Wind Information.
Economists have warned that supply-driven reflation risks further squeezing corporate profit margins and curbing household consumption demand.
“What we’re seeing is Chinese factories being squeezed from both sides,” said Josh Gilbert, principal analyst for APAC at trading platform eToro. Gilbert added that businesses are facing rising costs as weak demand and oversupply curb consumer inflation, but lack the pricing power to pass those costs on.
“Until domestic demand recovers, pressure on factory profit margins will continue to intensify,” Gilbert said.
China’s export growth in May exceeded expectations, rising 19.4% year-on-year in US dollar terms, the first significant increase in three months, supported by a surge in demand for renewable energy and AI-related products.
Consumer demand is a drag
Frederic Newman, chief Asia economist at HSBC Bank, said Chinese consumers “continue to hold tight to their hard-earned renminbi” as high household savings rates constrain spending at a time when the economy needs to find new growth engines other than exports.
Latest earnings of global luxury brands such as ralph lauren and LVMH Moët Hennessy Louis Vuittonshowed a recovery in demand for high-end beauty and fashion products in a market that has been plagued by discounts that have squeezed profit margins in recent years.
But economists warn that early signs of a high-end products revival, spurred by the recent technology-driven stock market rally and the wealth effect of last year’s lows, could prove fragile.
“It would be premature to generalize the recent improvement as evidence of a broader recovery in consumer sentiment,” said Neo Wang, lead China economist at Evercore ISI, as the real estate market remains weak and the job market remains weak.
