China’s Reflation Shows Signs of Peaking as Iran War Shock Fades

td(3u]ea]wglt3a[cpbn97qx_media_dl_1.png National Bureau of Statistics

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(Bloomberg) — China’s reflationary momentum showed signs of stalling in June, a reminder that the outlook for domestic prices is fragile as the economy emerges from deflation after an easing of tensions over Iran led to a pullback in commodity costs.

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Consumer inflation and the core gauge of prices both slowed more than expected from a year earlier, according to data released by the National Bureau of Statistics on Thursday. And while the effect of a low base from 2025 kept producer inflation on an upswing, factory prices declined 0.3% from May on a month-on-month basis, their first drop since July 2025. 

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“The fall in global crude oil prices led to a drop in prices for related sectors in China,” Dong Lijuan, a statistician with the NBS, said in a statement accompanying the release.

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The yield on China’s 10-year government bonds was steady at 1.73% after the data publication. The onshore yuan was little changed even as most currencies in Asia weakened against the dollar on Thursday.

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The waning strength of inflationary pressures predates the most recent flare-up between the US and Iran. China probably exited economy-wide deflation last quarter after a three-year stretch of declines in prices — a turnaround caused in large part by booming investment in artificial intelligence and the oil shock stemming from the conflict in the Persian Gulf. 

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As hostilities in the Middle East resumed this week, the uncertainty in the oil market sent Brent crude higher for three straight days. 

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“The latest escalation in US-Iran tensions could deliver some renewed upward pressure on inflation in the near-term,” said Julian Evans-Pritchard, head of China economics at Capital Economics. “But this will remain limited to a few narrow areas and inflation still looks set to return near zero once energy supply normalizes.”

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Despite the higher global cost of oil, chips and metals, however, a broader reflation remains in doubt as factories struggle to fully pass on higher costs to consumers because of sluggish consumer spending, putting their profitability under pressure. 

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China’s producer inflation, which only turned positive three months ago, quickened slightly in June to 4.1% from a year ago, matching forecasts. The consumer-price index decelerated for the first time since March and reached 1%, falling short of the 1.1% median estimate in a Bloomberg survey of economists.

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The core CPI, which strips out volatile food and energy prices, dipped to 1% in June, a sign domestic consumer demand is weakening even as trade booms. 

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The central bank also showed more concern about the increasing divergence in growth following a quarterly meeting of its monetary policy committee this month.

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Within CPI, increases in the cost of vehicle fuel slowed in June to 15% from a year earlier, compared with 21% in May. Prices for tobacco and home appliances also moderated, while pork deflation persisted.