Wholesale inflation in China surges amid AI and the Iran war.

• China's wholesale inflation hits a four-year high.
• AI and commodities are driving up Chinese industrial costs.
• Chinese CPI falls below market expectations.

Amid rising global energy costs and expanding investments in artificial intelligence, China recorded its biggest increase in wholesale inflation in almost four years in May. The data shows that industrial prices remain pressured by external factors, while domestic consumption continues to show signs of weakness.

The producer price index (PPI) rose 3,9% compared to the same period last year, exceeding both the market expectation of 3,8% and the 2,8% increase recorded in April. This result represents the strongest growth since July 2022 and reinforces the trend shift observed in recent months.

The resurgence of industrial inflation began in March, after a long period of deflation. One of the main factors behind this movement was the rise in raw material costs caused by the war between Iran and its regional adversaries, which affected traffic in the Strait of Hormuz and generated impacts on global energy flows.

Factories' spending on fuel and energy increased 10% year-on-year in May, accelerating significantly from the 4,4% increase in the previous month. Meanwhile, costs related to non-ferrous metals and wire jumped 22%, reflecting the increased value of these raw materials.

In addition to the effect of commodities, the rapid expansion of artificial intelligence has also contributed to putting pressure on industrial prices. The growing demand for computing power has increased the costs of technological equipment, electronic components, and semiconductors.

“The acceleration of the transition to electrification, the growing adoption of AI, and the increasing demand for computing have driven up prices for non-ferrous metals, electric machinery, and computer hardware,” said Dong Lijuan, chief statistician at the National Bureau of Statistics (NBS), in a statement on Wednesday.

The non-ferrous metals mining sector led the gains, with annual growth of 36,5%, while smelting advanced 24% in the same period.

The consumer price index (CPI) rose 1,2% in May compared to the same period last year, below the 1,3% projection made by economists. Compared to April, there was a decrease of 0,1%, indicating that the increase in industrial costs has not yet been fully passed on to consumers.

Gasoline prices for consumers rose 23,5% year-on-year. Even so, the core consumer price index (CPI), which excludes food and energy, grew only 1,1%, slightly below the 1,2% recorded in April. Food prices fell 1,7%.

“Inflationary pressure [resulting from rising 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.

Meanwhile, Chinese exports surprised positively. In May, overseas shipments grew 19,4% in dollar terms year-on-year, marking the largest increase in three months. Demand for products related to artificial intelligence and renewable energy helped sustain this performance.

Despite improvements in some consumer segments, economists note that many families continue to prioritize saving. The combination of difficulties in the housing market and less favorable employment conditions continues to limit a broader recovery in household spending.