HONG KONG (BLOOMBERG) - China's factory-gate inflation accelerated to a 13-year high, adding to the pressure on global consumer prices, which have been pushed up by a commodities boom, soaring shipping costs and an uneven economic recovery from the pandemic.
Producer prices in China rose 9.5 per cent in August from a year earlier, the National Bureau of Statistics (NBS) said on Thursday (Sept 9), mainly driven by higher commodity prices. US data due next week is forecast to show that consumer prices rose by more than 5 per cent for a third straight month in August as businesses raised prices for goods and services, even as the United States Federal Reserve claims the cost pressure will be temporary.
In the US, materials shortages, shipping bottlenecks and hiring difficulties will likely continue to put broader upward pressure on prices in the months ahead. Importers there and in Europe were already faced with historically high shipping costs to move the record amounts of goods they're buying from China, and this faster factory inflation will boost their costs just as they stock up for the holiday season.
"Our analysis shows quite close correlation between China's PPI (producer price index) inflation and the US CPI (cost price index) inflation," said Mr Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered in Hong Kong. "Our forecast envisages elevated PPI inflation by the year-end, before easing from next year. This implies inflation overshooting in the US may last for a while."
China's exports to the US through the end of August are up by a third compared with 2020, as the boost to US demand from stimulus and recovery combines with rising commodity costs and faster factory prices in China to drive up the value of goods trade. In addition to that, shipping costs have soared due to container shortages, shuttered ports, Covid-19 outbreaks and other factors, adding to the cost of moving goods from China to the US or elsewhere.
The rally in commodity prices has been a major driver of factory-gate inflation this year. The Chinese government's targeted steps to curb the rapid gains, such as boosting supplies and attempting to cutting back on hoarding, have had limited effect so far.
The surge in PPI was largely due to rising prices of products such as coal, chemicals and steel, Mr Dong Lijuan, a senior statistician at the bureau, said in a statement. Output prices in the coal mining industry grew the fastest, up 57.1 per cent in August from a year ago, according to an industry breakdown by the NBS.
Fitch Ratings this week raised its forecast for Chinese thermal coal import prices for both this year and 2022, as it sees demand rising faster than Chinese supply, especially as the government looks to cut back on pollution and carbon emissions. The continued effective ban on imports of Australian coal is also likely affecting prices in China.
"Commodity prices continue to light a fire under producer prices," and that is unlikely to change much for the rest of the year, said Mr Eric Zhu, China economist for Bloomberg Economics. "Any downside in factory-gate inflation will be limited as long as commodity prices stay elevated."
However, the gains in PPI aren't being passed through to Chinese consumer inflation, which remained subdued due to lacklustre demand, falling food prices and a drop in spending on travel services after the government imposed stringent controls to curb virus outbreaks in August. While the muted consumer inflation provides room for more policy support, this week's strong export data and comments from central bank officials suggest a smaller chance of further easing in the near future, economists say.
The People's Bank of China sees inflation pressure in the economy as controllable, saying last month that the pickup in producer prices in the first half was likely temporary. The economic recovery has also lost steam recently following the outbreak of new virus cases, adding to downward pressure on inflation.
That may be some comfort for the US Federal Reserve, which argues that the current bout of inflation is due in part to supply-chain disruptions brought by Covid-19 and likely to be transitory.
