BEIJING — China's factory-gate prices edged into positive territory for the first time in more than three years in March, signaling a potential shift in the country's long battle against deflation, even as consumer inflation cooled slightly amid skyrocketing global oil prices triggered by the escalating war between the United States and Iran.
The producer price index (PPI), which measures prices for goods at the factory level, rose 0.5 percent year on year in March, according to data released Friday by the National Bureau of Statistics. This marked the end of a deflationary streak that had persisted since September 2022, the longest such period in decades. For the first quarter of the year, however, the PPI still contracted by 0.6 percent compared to the same period a year earlier.
Consumer prices, tracked by the consumer price index (CPI), climbed 1 percent in March from a year ago, falling short of economists' expectations of 1.2 percent growth as polled by Reuters and decelerating from February's 1.3 percent increase. The core CPI, which strips out volatile food and energy prices, grew 1.1 percent year on year.
The uptick in factory prices comes against the backdrop of turmoil in global energy markets, where the conflict between the U.S. and Iran — now in its sixth week since erupting on February 28 — has severely disrupted oil supplies. Tehran has effectively sealed off the Strait of Hormuz to most commercial tankers, while major Middle Eastern producers have curtailed output, sending oil prices surging.
On Friday, the international benchmark Brent crude for June delivery traded at $96.7 a barrel, reflecting a 33 percent rally since the war's onset. U.S. West Texas Intermediate (WTI) crude futures for May delivery stood at $98.5 per barrel, up 47 percent from pre-war levels. As the world's largest oil importer, China is particularly vulnerable to these shocks, though its extensive strategic petroleum reserves and access to alternative energy sources have offered some mitigation.
"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, in an analysis of the data. He projected that the PPI would rise 1.2 percent in 2026, while the CPI would increase by 0.8 percent.
Morgan Stanley has trimmed its forecast for China's gross domestic product (GDP) growth this year by 10 basis points to 4.7 percent, assuming oil prices average $110 a barrel in the second quarter before easing. Should the Middle East conflict worsen and push oil above $150 per barrel through the second quarter, the bank warned, China's real GDP could slow to as low as 4.2 percent. "Even if the Strait reopens, slow supply normalization and inventory rebuilding could keep oil prices elevated," Xing added.
Signs of the strain are already evident in domestic fuel markets. China's National Development and Reform Commission, the country's top economic planning agency, announced on Tuesday an increase in retail prices for gasoline and diesel by 420 yuan ($61.18) and 400 yuan per metric ton, respectively. This follows a larger adjustment last month, when prices for gasoline and diesel were hiked by 1,160 yuan and 1,115 yuan per ton.
In March alone, gasoline prices jumped 11.1 percent from the previous month, despite Beijing's efforts to limit pass-through increases to shield consumers from energy-driven inflation. Year on year, gasoline costs were up 3.8 percent.
The oil market upheaval is reshaping the challenges facing Chinese manufacturers, who have only recently begun to see profit margins recover. Industrial firms reported a sharp jump in profits during the first two months of the year, bolstered by government initiatives to reduce overcapacity and end cutthroat price competition in various sectors.
However, economists caution that the current environment could reverse those gains. "This is evidenced by the fact that PPIRM — purchasing price index for raw materials, fuel and power — outpaced the PPI," growing 0.8 percent from a year ago, said Tianchen Xu, a senior economist at the Economist Intelligence Unit. He warned that profitability would likely face renewed pressure in a "cost-push inflation cycle," where manufacturers end up absorbing some of the upstream price hikes without fully passing them on.
Despite the inflationary pressures from commodities, overall consumer inflation remains subdued. The CPI reading of 1 percent is still well below the roughly 2 percent threshold that Chinese policymakers consider appropriate for healthy price growth. This, combined with the economic drag from the Iran conflict, leaves room for potential monetary easing, according to Xu.
The People's Bank of China (PBOC) has maintained a cautious approach to policy loosening. In a quarterly monetary policy meeting last month, the central bank reaffirmed its stance on gradual easing, following just one 10-basis-point cut to its policy interest rate earlier in 2025. Yields on China's 10-year government bonds remained relatively stable amid concerns over high oil prices, closing at 1.814 percent on Friday.
The interplay between these inflation metrics and external shocks underscores the delicate balancing act facing Beijing as it navigates domestic recovery and global uncertainties. While the return to PPI growth offers a glimmer of optimism for producers, the broader economy's resilience will hinge on how long the oil price surge persists and whether diplomatic efforts can de-escalate the U.S.-Iran war.
Analysts like Xing at Morgan Stanley emphasize China's relative advantages, including its ability to pivot to other energy suppliers and draw on stockpiles built up over years. Yet, prolonged high energy costs could exacerbate existing headwinds, from squeezed manufacturing margins to slower consumer spending, potentially complicating the government's growth targets for the year.
As the conflict enters its seventh week, international observers are watching closely for any signs of resolution that might stabilize energy markets. For now, China's economic policymakers appear poised to monitor developments while holding off on aggressive stimulus, betting on the country's structural buffers to weather the storm.