The pace of inflation accelerated in China during August, driven by rising costs of energy and raw materials, with continued supply risks resulting from the conflict in the Middle East, but weak domestic demand kept underlying price pressures limited, in an equation that increases the complexities of managing the second largest economy in the world.
Data from the National Bureau of Statistics showed that the producer price index rose 3.8 percent year-on-year, compared to 3.5 percent in July, exceeding Reuters poll expectations of 3.6 percent.
Consumer price inflation also accelerated to 0.8 percent from 0.5 percent, in line with expectations.
Dong Lijuan, a statistician at the bureau, said that the rise in global prices for crude oil and non-ferrous metals has led to an increase in prices in Chinese related industries. The impact was evident in the prices of smelting and processing non-ferrous metals, which jumped 20.8 percent year-on-year, while the prices of oil, coal and fuel processing rose 11.1 percent, and the prices of oil and gas extraction rose 10.5 percent.
The acceleration in energy inflation contributed about 0.28 percentage points to the annual increase in the CPI. This suggests that the bulk of current inflationary pressures are coming from the supply side and external costs, rather than from a strong recovery in consumption. Core inflation, which excludes food and energy, rose to just 1 percent, compared to 0.9 percent in July.
Nguyen Hoang Nam, an economist at Capital Economics, believes that the continuation of the conflict in the Middle East may keep inflation high for a longer period than previous estimates, but he expects consumer inflation to decline sharply next year, to record an average of 0.4 percent, with producer prices returning to deflation.
On a monthly basis, consumer prices rose 0.4 percent, exceeding expectations for a 0.3 percent increase, after falling 0.1 percent in July. Prices of fresh vegetables jumped 5.5 percent as a result of heat, heavy rain, and seasonal disruptions in supplies.
Cost pressures are not limited to energy; A shortage of memory chips linked to the surge in demand for artificial intelligence has pushed up costs in some industries. However, internal demand indicators remain weak, while consumption support programs have not yet succeeded in triggering a broad-based recovery. This is evident in the return to decline in home appliance prices, reflecting the declining impact of government replacement and support programmes. Ding Ming, chief economist at China CITIC Bank International, said that the continuation of core inflation at low levels means that price pressures will likely remain under control during the rest of the year, and that a sustained rise in inflation requires a stronger recovery in domestic demand.
Beijing is trying to address this weakness by expanding loan interest support for consumers and small private companies, with the Ministry of Finance ready to provide additional support if circumstances require it.
The authorities have also taken measures to support the real estate market, including extending the maximum limit on personal mortgage loans to 40 years.
Thus, China faces a clear economic paradox: imported inflation driven by energy and raw materials, versus domestic demand that is still unable to generate strong price pressures.
The course of the conflict in the Middle East and oil prices on the one hand, and the strength of the recovery in Chinese consumption on the other hand, will determine whether the current wave of inflation will continue until the end of the year, or remain limited and temporary.
The research arm of the China Petroleum and Chemical Corporation (Sinopec) expected that demand for oil in China would decline by 600,000 barrels per day in 2026, or the equivalent of 8.9 percent compared to last year, marking the third consecutive annual decline in light of the rise in oil prices, which led to curbing consumption and accelerating the pace of demand for electric vehicles.
The decline in demand for oil, or the long-term decline in consumption, in the largest oil importing country in the world was a major factor in reducing China’s imports of crude and curbing the further rise in global oil prices, despite the severe disruptions in supplies through the Strait of Hormuz due to the Iran war.
Gasoline and diesel are expected to lead the decline in consumption in China by 8.7 percent and 11.4 percent, reaching 149 million tons and 164 million tons, respectively.
On the other hand, the Sinopec Institute for Economic Research and Development stated in a report that the demand for aviation fuel may rise 1.3 percent on an annual basis to reach 41.55 million tons in 2026.
The report added that while China's refining capacity is expected to rise to 952 million tons annually in 2026, the quantities of processed crude oil declined to 697 million tons between the second and third quarters.
Pakistan prepares to receive much-needed LNG shipments; A tanker loaded with fuel from Qatar crossed the Strait of Hormuz, and another tanker is scheduled to follow.
The tanker “Al Marouna” crossed the waterway earlier this week, and is scheduled to arrive in Pakistan by tomorrow, Thursday, according to ship tracking data collected by Bloomberg News Agency.
Another tanker carrying Qatari liquefied natural gas is expected to cross in the coming days, also heading to the South Asian country, according to what traders familiar with the matter said, according to Bloomberg on Wednesday.
This development is likely to mean that Pakistan, which had previously brokered peace talks between America and Iran, will not need to buy huge quantities of liquefied natural gas from the spot market, a market where assets are traded and delivered instantly. As prices rose to their highest levels since late 2022.
The Pakistani government was suffering from repeated power outages, after the almost complete closure of the Strait of Hormuz necessarily led to the cessation of supplies from Qatar, which is the country's main supplier.
