Rising energy costs lift China’s producer, consumer inflation in August

China's factory gate inflation climbed in August, while consumer price growth accelerated, primarily due to rising energy costs linked to geopolitical tensions in the Middle East, despite subdued domestic demand. The producer price index increased 3.8% year-on-year, surpassing expectations of a 3.6% rise, while the consumer price index climbed 0.8% year-on-year, aligning with forecasts.

Dong Lijuan, a statistician at the National Bureau of Statistics, attributed the surge in energy prices to the global oil price hike and related industry costs. Among the most notable increases were non-ferrous metal smelting and processing, which rose by 20.8%, and petroleum processing, which climbed by 11.1%. Core inflation, excluding food and energy prices, climbed 1% year-on-year, up from 0.9% in July.

Analysts predict that the conflict in the Middle East will keep inflation elevated for a longer period than anticipated, with consumer price inflation expected to decelerate sharply next year, averaging just 0.4%, while producer prices could return to deflation. Despite the persistence of domestic demand weakness, inflation remains contained, with core inflation staying at a relatively low level, indicating that inflationary pressure will likely remain under control throughout the year.

However, a sustained rise in inflation will depend on improvements in domestic demand. To support consumer confidence, policymakers have intensified measures, such as expanding loan-interest subsidies for consumers and small private firms, and signaling additional fiscal support if economic conditions warrant. In an effort to stabilize the housing market, a significant drag on household spending, Beijing implemented measures to curb housing presales and extended the maximum term for personal mortgage loans to 40 years from 30.

Despite pockets of deflation persisting in the economy, consumer prices are likely to settle into a low, positive range.