China factory prices extend surge, lifting reflation outlook

Chinese employees working on micro and special motors for mobile phones at a factory in Huaibei.
Chinese employees working on micro and special motors for mobile phones at a factory in Huaibei.PHOTO: AFP

BEIJING (BLOOMBERG) - China's producer prices surged at the fastest pace since 2008, further lifting the outlook for global reflation.

The producer price index rose 7.8 per cent last month from a year earlier, compared with a median estimate of 7.7 per cent in a Bloomberg survey and a 6.9 per cent gain the prior month. Factory prices only swung out of 4 1/2 years of deflation in September.

The consumer price index rose 0.8 per cent versus a 1.7 per cent increase forecast by analysts. The data are distorted by the week-long Chinese New Year holiday, which started in February last year, driving up food prices as families prepare for gatherings, whereas it fell in late January this year, when CPI climbed to a 2 1/2 year high of 2.5 per cent.

China is lifting the global price outlook as producer inflation climbs and a pick up in demand fuels commodity prices. Still, economists see such forces moderating as year-earlier comparisons begin to rise and policy curbs restrain the property market.

"The two biggest growth drivers last year - reflation and property - could reverse soon," Larry Hu, head of China economics at Macquarie Securities in Hong Kong, wrote in a note. Producer prices are poised to moderate in the second quarter as property "is entering a down-cycle on policy tightening and sales front-loading last year."