China May wholesale inflation hits near 4-year high on Iran war-led higher input costs, AI boom

China’s wholesale prices rose at the fastest pace in nearly four years in May, driven by surging raw material costs due to the Iran war and an artificial intelligence investment boom, while consumer inflation came in below estimates.

The producer price index jumped 3.9% from a year ago, the highest since July 2022, topping economists’ forecast of 3.8%, and outpacing 2.8% in April, according to data released by the National Bureau of Statistics on Wednesday.

Wholesale prices returned to growth in March as the input cost surge stemming from the Middle East conflict lifted the economy out of its longest deflationary streak in decades. The Iran war has throttled traffic through the Strait of Hormuz, disrupting energy and raw material flows.

Factories’ purchasing prices for fuel and power climbed 10% year on year in May, widening from 4.4% in April. Costs for non-ferrous metal materials and wires surged 22%.

Aside from higher commodity costs, wholesale prices were also lifted by a growing demand for artificial intelligence computing power, pushing up prices for tech equipment and semiconductors.

“The accelerating shift to electrification, deepening AI adoption and surging computing demand pushed up prices across non-ferrous metals, electrical machinery and computer hardware,” Dong Lijuan, chief statistician at NBS, said in a statement Wednesday. Non-ferrous metal mining led gains at 36.5% year on year, with smelting up 24%.

Consumer prices rose 1.2% in May from a year earlier, missing economists’ estimates of 1.3% growth in a Reuters poll. On a month-on-month basis, consumer inflation dropped 0.1% from April. Gasoline prices for consumers rose 23.5% from a year earlier.

Core CPI, excluding volatile food and energy prices, grew 1.1% in May from a year earlier, edging down from the 1.2% increase in April. Food prices declined 1.7% from a year earlier.

“The inflationary pressure [from higher energy costs] in the consumer sector is not strong, as domestic demand remains weak,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.

CSI 300 index fell around 1% while the Hang Seng Index lost 0.8%. Yield on the 10-year Chinese government bond was little changed at 1.740%, LSEG data showed.

China has cushioned the worst of the energy shock through its strategic oil stockpiles and a diversified mix of renewable energy sources. The world’s largest oil importer has trimmed its crude imports by nearly 20% since the outbreak of the Iran war, according to official customs data compiled by Wind Information, capping global oil prices from trading even higher.

Economists have warned that supply-driven reflation risks further pressuring companies’ profit margins and dampening household consumption demand.

“What we’re seeing is Chinese factories being squeezed from both sides,” said Josh Gilbert, lead analyst for APAC at trading platform eToro. Companies face rising costs but lack pricing power to pass them on, as weak demand and oversupply cap consumer inflation, Gilbert added.

“Until domestic demand recovers, the squeeze on factory margins only builds from here,” Gilbert said.

China’s export growth held up better than expected in May, growing 19.4% from a year earlier in U.S. dollar terms, the largest jump in three months, supported by soaring demand for renewable and AI-related goods.

Consumers in China are “keeping a tight fist around their hard-earned renminbi,” said Frederic Neumann, chief Asia economist at HSBC Bank, as the high household saving rate depressed spending at a time when the economy needs to find new drivers of growth besides exports.

Latest earnings from global luxury brands, such as Ralph Lauren and LVMH Moet Hennessy Louis Vuitton, indicated recovering appetite for high-end beauty and fashion products in a market plagued by margin-eroding discounts in recent years.

Economists, however, cautioned that the early signs of high-end revival — boosted by wealth effect from recent tech-driven equity market rally and last year’s low base — may prove fragile.

“It would be premature to generalize the recent improvement as evidence of a broad-based recovery in consumer sentiment,” said Neo Wang, lead China economist at Evercore ISI, amid a persisting property market slump and bleak jobs market.