China's PPI rises for the first time in more than three years after a prolonged decline

China’s Producer Price Index (PPI) rose in March, ending a 41-month streak of declines and highlighting growing concerns that the US–Iran conflict could be increasing input-cost pressures for the world’s second-largest economy.

PPI turns higher after 41 months

Official data released by the National Bureau of Statistics (NBS) on April 10 showed China’s March PPI increased 0.5% year on year, slightly above economists’ forecast of 0.4% in a Reuters poll.

Economists cited by Reuters warned that a shift from deflation to inflation driven by higher costs—rather than stronger demand—could complicate policymaking. They said it may erode corporate margins, weigh on growth, and limit room for stimulus measures as the economy faces multiple headwinds.

“Involution” and price competition

Reuters noted that part of the prolonged producer-price deflation has been linked to a race among manufacturers to cut prices, a phenomenon described as “involution.”

“Imported inflation is not good for the economy. To truly erase the risk of deflation, China still needs to push back against ‘involution’ and stimulate domestic demand,” said Xing Zhaopeng, a senior strategist at ANZ, in an interview with Reuters.

Cost shock risks for jobs and wages

Higher input costs in China’s manufacturing sector—often described as the “workshop of the world”—could threaten jobs and wages. Reuters pointed to data showing that about a quarter of China’s manufacturing enterprises are operating at a loss after years of overcapacity, contributing to an ongoing price-competition cycle.

With domestic demand weak and external demand slowing, Reuters said the economy has limited capacity to absorb further input-cost shocks. At the end of March, an adviser to the People’s Bank of China warned that China must balance inflation risk against a growth slowdown.

Where PPI rose most

According to the NBS, the March PPI increase was largest in energy-intensive industries. The nonferrous metals mining sector rose 36.4% year on year, while the ferrous metals and metal processing sector increased 22.4%.

Uncertainty over drivers: Middle East disruption vs domestic policy

Analysts said it remains unclear how much of the March PPI rise reflects supply disruptions tied to the Middle East conflict versus demand effects from China’s anti-involution campaign.

“It is still unclear how much of the March PPI rise is due to supply disruptions from the Middle East conflict versus growth in demand driven by the government’s anti-involution campaign. The Middle East situation remains highly uncertain, so inflation prospects for many countries, including China, are equally uncertain,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Broader inflation signals and policy implications

Reuters said the US–Iran conflict has unsettled global economic calculations, forcing policymakers to weigh slower growth against rising inflation risks. Japan’s CPI also rose sharply in March, fueling speculation that the Bank of Japan could raise rates as early as April.

CPI rises slowly, with month-on-month decline

NBS data also showed China’s consumer price index (CPI) rose slowly in March, though Reuters noted it could be temporary as the Middle East war may push consumer prices higher in coming months.

CPI increased 1.0% year on year in March, compared with 1.3% in February and above the 1.2% forecast.

On a month-on-month basis, March CPI fell 0.7%, deeper than the forecast for a 0.2% decline and compared with a 1.0% increase in February.

Cost-push dynamics and profit pressure

“Among Asian economies that have published March inflation data, China is the only one with a CPI decline from the previous month. In a cost-push inflation cycle, firms often cannot pass all cost increases to end consumers. When absorbing part of the cost increases, firms’ profits shrink,” said Xu Tianchen, a senior economist at the Economist Intelligence Unit (EIU).

Energy-price adjustments and core inflation

Since late February, China has allowed domestic retail gasoline prices to rise, but Reuters said the increases have been limited to mitigate energy-price shocks.

Core CPI, excluding food and energy, rose 1.1% year on year, down from 1.8% in February.

“Prices in China need to rise much more to create inflation signals that could lead to a meaningful policy shift,” said Marco Sun of MUFG Bank (China).