China Factory Inflation Soars to 2008 High on Commodity Boom

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(Bloomberg) — Surging commodity costs drove China’s factory-gate inflation to its highest level since 2008 in May, further adding to global price pressures.

The producer price index climbed 9% from a year earlier, following a 6.8% gain in April, the National Bureau of Statistics said Wednesday. The median forecast in a Bloomberg survey of economists was for a 8.5% increase. Consumer prices increased 1.3% from a year ago, missing an estimate of 1.6%.

Commodity prices have rallied this year, prompting Chinese policy makers to take targeted steps to curb soaring prices, including considering imposing price controls on coal, expanding supply of raw materials and cracking down on speculation and hoarding. Still, consumer inflation remains relatively subdued, suggesting retailers aren’t hiking prices yet in the face of sluggish domestic demand.

Higher producer prices “cannot be passed on to the consumer completely” and may only start to affect consumer inflation in the fourth quarter of this year, Iris Pang, chief economist for Greater China at ING Bank NV, said in an interview with Bloomberg TV. The latest Covid-19 outbreak in the southern province of Guangdong will dampen consumer demand in the coming months, while the recovery in overseas markets has just started, she said.

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China’s CSI 300 Index was flat as of 10:45 a.m. after a volatile trading session. The onshore yuan strengthened slightly to 6.3962 per dollar.

The rally in commodity prices has been fueled by the global recovery, pandemic-induced supply shortages, and record stimulus by governments around the world. So far, the impact of higher metal prices has showed up mainly in upstream industries involved in the mining and processing of raw materials, while price increases in downstream industries like furniture and textiles have been minimal, according to an analysis by Bloomberg Economics.

“China’s industrial product prices continued to rise in May, as commodity prices, including international crude oil, iron ore and non-ferrous metals rose sharply, and domestic demand recovered steadily,” Dong Lijuan, an economist with the statistics bureau, said in a statement. Of the 9% year-on-year growth, base effects contributed 3 percentage points and new price hikes contributed 6 percentage points, she said.

What Bloomberg Economics Says…

The People’s Bank of China sees the inflationary pressures as transitory, in our view. It’s also mindful of the need to sustain support for an incomplete economic recovery. A rate hike isn’t likely anytime soon.

Chang Shu, chief Asia economist

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Rising producer costs and strong export demand could give Chinese manufacturers more leeway to hike prices, adding to global inflation worries. Michelle Lam, Greater China economist at Societe Generale SA, said export prices could pick up in dollar terms due to the yuan’s appreciation, while supply-side bottlenecks in other emerging markets are favorable for the bargaining power of Chinese exporters.

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Domestically, the pass through from PPI to consumer prices has been limited, given that the link between the two has weakened. Intense competition among smaller businesses, spurred by the rise of e-commerce, and weak domestic demand means China’s factories are absorbing rising input costs rather than passing them on to consumers at home.

Core CPI, which strips out volatile food and energy costs, rose 0.9%, with most of the increase in consumer prices coming from non-food items. The almost 24% fall in pork prices undercut stronger price rises for most other foods. Separately to the data, the government pledged to increase the supply of key food products to stabilize prices and add to the national pork reserve, according to the report of a meeting held Tuesday.

Authorities have said PPI will likely continue to climb through the second quarter before moderating in the second half of this year. However, the People’s Bank of China is likely to avoid hiking interest rates in response to the inflation data and also keep liquidity in the banking system tightly balanced, economists say.

“We expect the PBOC to maintain benchmark rates unchanged and still focus on guiding credit growth lower gradually in coming months without sharp or abrupt tightening,” said Peiqian Liu, an economist at Natwest Group Plc.

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