China's factory-gate inflation at fastest in nearly 4-1/2 years in October

China's factory-gate inflation surged to its fastest pace in nearly four and a half years in October, driven by higher oil prices that increased manufacturing costs, according to data released on Monday. Simultaneously, consumer inflation softened due to weak domestic demand. The war in the Middle East has kept energy prices elevated, impacting sectors such as coal mining, oil and natural gas extraction and processing, chemicals, and other energy-intensive industries, which are major contributors to producer-price inflation.

However, these upstream price pressures have not yet fully translated into consumer prices due to subdued household demand in China's second-largest economy.

The producer price index (PPI) increased by 5.7% year-on-year in October, outpacing both the 5% rise in September and the Reuters poll forecast of a 5.3% increase, marking the highest annual rise since June 2022 when the PPI jumped by 6.1%. In contrast, the consumer price index (CPI) rose by 0.7% year-on-year, slightly below economists' expectations of a 0.8% increase.

Fears persist that the external price shock from the Middle East conflict will sustain inflationary pressures for several months, but its effect is expected to diminish next year. Analysts anticipate a potential return to deflationary trends in producer prices, as occurred prior to the outbreak of the Middle East war, while consumer inflation is projected to average 0.4% in 2027.