Factory Inflation in China Hits Almost a Four-Year Peak, While Domestic Demand Stays Weak

China’s factory prices rose at their fastest pace since July 2022, largely influenced by the fallout from the Iran war. In contrast, lower food prices are helping to contain consumer inflation.

According to data released by the National Bureau of Statistics on Monday, producer prices increased by 2.8% in April compared to the same month last year, after a 0.5% gain the previous month.

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In a surprising turn for analysts expecting a slight slowdown, the consumer-price index unexpectedly rose from 1% in March to 1.2% year-on-year.
The deflation in China’s manufacturing sector, persisting for three and a half years, has come to an end due to the most significant energy disruption in generations, triggered by the conflict in Iran.

However, with domestic demand remaining weak and the labor market showing signs of decline, businesses are struggling to transfer higher costs to consumers, further squeezing profit margins.

Despite a surge in input cost inflation, companies are cutting prices even in sectors like services.

Since late 2022, China has faced a deflationary spiral driven by intense pricing wars due to manufacturing oversupply and low domestic demand.