China's PPI year-on-year 2.8% exceeds expectations; when will downstream consumption take over?

On May 11th, the National Bureau of Statistics released data showing that China’s PPI in April surged to 2.8% year-on-year, far exceeding market expectations of 1.8% and the previous value of 0.5%, reaching the highest level since August 2022; month-on-month, it increased by 1.7%, the largest gain in nearly four years. On the consumption side, despite the drag from a sharp decline in food prices, CPI still showed strong resilience, unexpectedly rising from 1.0% last month to 1.2% year-on-year, also surpassing the market consensus of 0.9%.

Driven by global energy shocks and input-driven inflation from the AI capital expenditure cycle, although PPI in March had already risen to the positive range (+0.5%) year-on-year, the jump to 2.8% in April substantially indicates that China’s PPI has ended a long-term price decline cycle of over three and a half years and entered a re-inflation phase.

Structurally, this is a completely energy and raw material-led inflation: oil and natural gas extraction prices soared by 18.5% month-on-month, and surged to 28.6% year-on-year; oil, coal, and other fuel processing industries increased by 16.4% month-on-month; and gradually spread from resource products to the internal production system, with chemical raw materials and chemical product manufacturing rising by 8.3% month-on-month. The oil-related industries contributed a total of 0.9 percentage points to the PPI month-on-month increase; combined with refining, chemical, and other industries, they contributed a total of 85% to the PPI month-on-month increase.

Additionally, the expansion of global AI computing power demand has driven continuous high growth in the demand for copper, chips, fiber optics, servers, and other industry chains, with non-ferrous metal mining and processing industries increasing by 38.9% year-on-year. The surge in computing power demand has driven fiber optic manufacturing prices up by 22.5% month-on-month. Coupled with domestic electrification and anti-involution key drivers, prices of energy, non-ferrous metals, and AI-related materials have risen, collectively pushing the overall PPI inflation (year-on-year +2.8%) up by 3.54 percentage points; contributions are 1.50%, 1.58%, and 0.46%, respectively.

Excluding these factors, PPI inflation would still be in negative territory, with consumer goods PPI being the main drag (-1%). Among them, prices of non-metallic mineral products related to construction and real estate (such as cement) fell by 5.5% year-on-year.

Regarding CPI, the increase was mainly driven by gasoline prices (up nearly 20% year-on-year) and rising prices for holiday travel services, while core CPI excluding food and energy rose slightly to 1.2% year-on-year, and core commodity CPI showed a downward trend. This clearly reflects a scenario of hot upstream and sluggish downstream, with no significant signs of broad transmission yet.