Industrial inflation in China surges as officials warn of risks

Producer prices in China have risen the most since July 2018 due to rising commodity prices, a worrying sign for policymakers seeking stable inflation and exacerbating global risks.

The producer price index rose 4.4% in March from a year earlier after rising 1.7% in February, the National Bureau of Statistics said Friday, higher than the median forecast of 3.6% in a Bloomberg survey of economists. The consumer price index rose 0.4% year-over-year after falling for two consecutive months.

After months of deflation this year, producer prices have started to rise sharply as prices for oil, copper and agricultural commodities rise. This attracted the attention of high-ranking politicians, including the Committee for Financial Stability and Development. chaired by Vice Premier Liu He is calling for efforts to stabilize prices this week. Authorities should “closely monitor commodity prices,” according to a statement released Thursday evening after the committee meeting.

As the world’s largest exporter, rising prices in China threaten to further fuel global inflation and exacerbate chaos in financial markets. Inflation risks are already on the rise due to a stronger global economic recovery, massive US fiscal stimulus and soaring shipping costs.

“Our research has shown that China’s PPI is highly positively correlated with US CPI,” said Raymond Yeung, chief economist for Greater China in Australia-New Zealand. “Producer price index data can influence how people think about inflationary pressures in the US and around the world, and this influence should not be underestimated.”

The CSI 300 fell 1.3% in morning trading sessions in Shanghai, with spirits making the largest contribution. Copper futures in Shanghai fell slightly, while construction steel futures fell 0.9%.

What Bloomberg Economics Says …

There was a noticeable divergence under the rise in Chinese inflation in March: commodity-linked prices were the main driving forces, while demand-linked prices were relatively stable. There are two implications: industrial firms will benefit from higher input prices, and consumers are not quite back on their feet.

– David Koo, Economist

Growing profits

Inflation data showed that consumption remains low, giving the central bank a reason not to tighten monetary policy anytime soon, according to ANZ’s Yeung. “But if inflationary pressures start to show up in consumer prices, the policy could start to tighten,” he said.

Consumer price deflation in recent months has been largely driven by the fall in the price of pork, a key component of the CPI basket. While prices are likely to rise, the slow recovery in household spending means that inflation is likely to remain low. Core consumer prices, excluding volatile energy and food prices, rose 0.3% in March from a year earlier, while food prices fell 0.7% in March from a year earlier.

“The recovery in the manufacturing industry is fast, but the rate of recovery in consumption is far from ideal,” said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore. “The recovery of the services sector is also not ideal, but production is exceptionally good, which means that production will continue to stimulate economic growth in the future, while services will slow down,” he said, adding that the PPI growth rate could rise to more than 7% in the next two to three months.

For Chinese enterprises, higher factory prices mean higher profits and a greater ability to pay off debt with According to the latest data, industrial profits in the first two months of the year jumped compared to the same period in 2020. However, purchase prices for industrial companies in March grew even faster than prices for finished goods, which may reduce profits if this continues.

– With the help of John Liu, Yinan Zhao, Yujing Liu, Lianting Tu, and Jason Rogers.

(Updates with comments from economists)