China factory prices return to growth after 3 years, beating expectations on surging oil prices

China’s factory-gate prices rose for the first time in more than three years while consumer inflation moderated in March, amid a surge in oil prices as the Iran war upended global energy markets.

The producer price index grew 0.5% from a year earlier, the first growth since September 2022, ending the longest deflationary streak in decades. For the first quarter, the PPI fell 0.6% year on year.

Consumer prices climbed 1% in March from a year earlier, missing economists’ forecast of 1.2% growth in a Reuters poll and slowing from a 1.3% rise in February, according to data released by the National Bureau of Statistics on Friday.

Core CPI, which excludes volatile items like food and energy, grew 1.1% in March from a year earlier.

The war between the U.S. and Iran, now in its sixth week, has pushed oil prices sharply after Tehran effectively closed the Strait of Hormuz to most commercial tankers and major Middle East producers curbed oil production.

The international benchmark Brent June contract traded at $96.7 a barrel on Friday, after a 33% rally since the war began on Feb 28. U.S. WTI crude futures for May delivery were at $98.5 per barrel, up 47% compared to pre-war levels.

China, the world’s largest oil importer, faces potential inflationary spillovers, though its massive strategic stockpiles and diversified energy sources have provided some cushion for the economy.

“China fares better than its peers amid a sizable yet not extreme oil shock, given its energy fungibility and policy flexibility with low starting inflation,” said Robin Xing, chief China economist at Morgan Stanley. He estimates the country’s PPI to rise 1.2% in 2026, while CPI will increase 0.8%.

The Wall Street bank has cut its forecast for China’s GDP growth this year by 10 basis points to 4.7%, assuming oil averages $110 a barrel in the second quarter before receding.

Should the Mideast conflict continue to deteriorate, pushing oil prices above $150 per barrel through the second quarter, China’s real GDP may slow to 4.2% this year, the bank said. “Even if the Strait reopens, slow supply normalization and inventory rebuilding could keep oil prices elevated,” Xing said.

In a sign of mounting pressure, China’s top economic planning agency on Tuesday raised retail prices for gasoline and diesel by 420 yuan ($61.18) and 400 yuan per metric ton, respectively. Last month, policymakers raised prices by 1,160 yuan and 1,115 yuan per ton.

In March, gasoline prices jumped 11.1% from the prior month, even as Beijing sought to cap the fuel price hikes to cushion the blow from energy-driven inflation for consumers. On a year-on-year basis, gasoline bills were up 3.8%.

The upheaval in oil markets has the potential to alter the calculus for policymakers as economists warned that input-cost shock could spark “bad inflation” in the economy, further squeezing manufacturers’ already-thin profit margins.

China’s industrial firms saw their profits jump sharply in the first two months this year, thanks to Beijing’s push to curb overcapacity and bruising price wars sweeping across sectors.

However, profitability will likely come under renewed pressure in a “cost-push inflation cycle,” where manufacturers absorb some upstream price hikes, said Tianchen Xu, senior economist at Economist Intelligence Unit.

“This is evidenced by the fact that PPIRM — purchasing price index for raw materials, fuel and power — outpaced the PPI, growing 0.8% from a year ago,” said Xu.

CPI, while edging higher, remains well below the 2% threshold policymakers view as appropriate, and growth drag from the Iran war keeps the door open for potential monetary easing, Xu added.

The People’s Bank of China reaffirmed its cautious monetary easing stance in a quarterly meeting last month, after delivering only one 10-basis-point reduction in the policy interest rate in 2025.

Yield on China’s 10-year government bonds held relatively steady even amid lingering concerns about elevated oil prices, standing at 1.814% on Friday.