China factory prices rise fastest in 5 years, add to reflation

China's Details PPI jumped 5.5 per cent in December from a year earlier.
China's Details PPI jumped 5.5 per cent in December from a year earlier. PHOTO: AFP

BEIJING (BLOOMBERG) - China's producer price index rose at the fastest pace in more than five years in the last month of 2016 as the factory to the world swings from being a drag on global inflation to another potential force pushing prices higher.

The Details PPI jumped 5.5 per cent in December from a year earlier, compared to the median estimate of 4.6 per cent in a Bloomberg survey and the 3.3 per cent gain in November Consumer-price index rose 2.1 per cent, versus 2.2 per cent gain forecast by analysts.

Only four months out of a multi-year factory deflation, the world's second-largest economy is poised to export inflation to nations around the globe through its supply chains as manufacturers squeezed by higher input costs raise asking prices. Whether that rebound will be sustained hinges on how the global economy fares under a Donald Trump presidency and whether trade tensions flare between the US and China.

"Reflation continues in the factory sector," said Ms Julia Wang, an economist at HSBC Holdings in Hong Kong. "The stable CPI suggests that the reflation is confined mostly in the industrial sector and hasn't filtered into the real economy. So the PBOC would possibly not respond to it until inflation expands to the real economy."

"Producer prices rose faster than we expected in the last quarter, but that may have over-stated the strength," said Mr Harrison Hu, chief greater China economist at NatWest Markets, a unit of Royal Bank of Scotland Group. He expects PPI to peak this quarter, while consumer inflation will quicken slightly this year.

"The PBOC would like to see subdued inflation with PPI stronger than the CPI so that companies are more able to pay off debts."

"High commodity prices will delay the government effort to deal with over capacity," Mr Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group in Hong Kong. "Producers are tempted to fire the engine again."

Among producer prices, those for mining surged 21.1 per cent in December from a year earlier while raw materials increased 9.8 per cent. Purchasing prices climbed 6.3 per cent from a year earlier, led by fuel and metals. Consumer prices of food climbed 2.4 per cent, while non-food prices increased 2 per cent.