Last year, with inflation consistently negative, the spectre of deflation haunted Chinese policymakers. That is no longer the case today. In April, annual inflation rose to 1.2%, up from 1% in March and just 0.2% in January.
As in most economies worldwide, despite measures introduced by Chinese authorities to soften the impact, the surge in oil prices has been the main driver of inflation in China.
Inflation is expected to continue rising in the coming months, as producer prices in the Middle Kingdom are increasing sharply (+2.8%). Barely positive in March (+0.5%) after 41 months in negative territory, factory-gate inflation is now at its highest level since July 2022.
Inflation pressures and competitiveness
Overall, the rebound in inflationary pressures is not bad news for the Chinese economy. Despite the recent increase in producer prices, Chinese goods remain highly competitive internationally and will continue to flood foreign markets.
The country’s exports are more threatened by a global economic slowdown or renewed trade-war tensions than by higher prices.
At the domestic level, the return of inflation could encourage Chinese consumers to bring forward certain purchases in order to avoid future price increases.
This would support the recovery in household consumption, which remains essential to rebalance an economy that is currently too dependent on external markets.
Resilience amid geopolitical tensions
The Chinese economy is coping relatively well with the shock of the war in the Middle East. Thanks to its significant strategic reserves and privileged ties with Iran, China has been relatively insulated from disruptions in oil markets.
From a diplomatic perspective, the Iranian crisis is even strengthening China’s position, which is positive for its exports.
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