China's factory inflation surges to 26-year high

This could add to global inflation risks if local producers pass on higher costs to consumers

BEIJING • China's factory-gate prices grew at the fastest pace in almost 26 years last month, potentially adding to global inflation pressure if local businesses start passing on higher costs to consumers.

The producer price index (PPI) climbed 10.7 per cent from a year earlier, beating forecasts and reaching the highest since November 1995, as coal prices and other commodity costs soared, data from China's National Bureau of Statistics (NBS) showed yesterday.

There is little evidence yet that consumer goods factories are passing on higher input costs to customers, with consumer prices growing at a slower pace of 0.7 per cent last month.

However, that could change as producers see their profits squeezed and China braces itself for higher electricity prices amid an energy crunch.

"The widened gap between PPI and CPI (consumer price index) means greater pressure for upstream sectors to pass on rising costs to the downstream," said Mr Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.

People's Bank of China governor Yi Gang told a Group of 20 forum that China's inflation is "moderate", according to a statement on the central bank's website yesterday. He reiterated that monetary policy would be flexible, targeted, reasonable and appropriate.

Countries, from Latin America to Europe, have been seeing higher-than-usual consumer price inflation this year. On Wednesday, United States data showed consumer prices grew 5.4 per cent last month from a year earlier, even as the Federal Reserve has insisted that most of the price pressure is a transitory effect of a global economy emerging from the pandemic.

As the world's largest exporter, China's prices are another risk factor for the global inflation outlook. However, economists generally believe the influence is modest because product baskets that countries use to calculate consumer prices tend to contain more locally produced services than consumer goods from China. Research by Standard Chartered found only a moderate degree of correlation between China's CPI and US consumer prices in recent years.

The jump in China's PPI was mainly fuelled by skyrocketing coal prices and other energy-intensive products, according to the NBS. Surging coal prices and policy goals to cut energy consumption have led to an electricity shortage, resulting in power rationing and factory production halts in over 20 provinces last month.

Prices of other commodities such as crude oil also continued to climb, with the Bloomberg Commodity Index rising 5 per cent for the month.

With coal futures at a record high and the government allowing electricity prices to rise, inflation pressure will start filtering through to consumers. China's largest soya sauce maker said this week it plans to raise retail prices of its products.

At least 13 companies listed on China's A-share market have announced price hikes this year, while tyre producers said they plan to adopt new price policies this month, according to state media reports.

Mr Zhaopeng Xing, a senior China strategist at Australia & New Zealand Banking Group, said PPI will probably reach 12 per cent this month or next month, and come in at 7.5 per cent for the full year. Consumer prices will rise modestly to 2 per cent in the fourth quarter to reach 0.9 per cent in 2021, he said.

The lack of pass-through to CPI means that China still has room for monetary easing as its economy slows.

Many economists still expect the central bank to cut the reserve requirement ratio for banks to help spur liquidity in the economy.

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A version of this article appeared in the print edition of The Straits Times on October 15, 2021, with the headline 'China's factory inflation surges to 26-year high'. Subscribe