Energy Fuels China's Inflation, While Demand Curbs Prices

China’s inflation accelerated in August, driven by rising energy and raw material costs, amid ongoing supply risks stemming from the Middle East conflict. However, weak domestic demand kept core price pressures contained, adding complexity to the management of the world’s second-largest economy.

Data from the National Bureau of Statistics showed that the Producer Price Index (PPI) rose 3.8 percent year-on-year, up from 3.5 percent in July, surpassing Reuters survey expectations of 3.6 percent. Consumer price inflation also accelerated to 0.8 percent from 0.5 percent, in line with forecasts.

Dong Lijuan, a statistician at the bureau, said that higher global prices for crude oil and non-ferrous metals pushed up prices in related Chinese industries. The impact was evident in the prices for smelting and processing non-ferrous metals, which surged 20.8 percent year-on-year, while prices for oil, coal, and fuel processing rose 11.1 percent, and oil and gas extraction prices increased 10.5 percent.

The acceleration in energy inflation contributed approximately 0.28 percentage points to the annual increase in the Consumer Price Index (CPI). This indicates that the bulk of current inflationary pressures stem from the supply side and external cost factors, rather than a strong recovery in consumption. Core inflation, which excludes food and energy, rose only to 1 percent, compared to 0.9 percent in July.

Nguyen Hoang Nam, an economist at Capital Economics, stated that the ongoing Middle East conflict could keep inflation elevated for longer than previously estimated. However, he expects consumer inflation to decline sharply next year, averaging 0.4 percent, as producer prices return to deflation.

On a monthly basis, consumer prices rose 0.4 percent, exceeding expectations of a 0.3 percent increase, after falling 0.1 percent in July. Fresh vegetable prices jumped 5.5 percent due to heat, heavy rainfall, and seasonal supply disruptions.