China’s producer inflation at its highest level in 26 years adds to global risks

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(Bloomberg) – Prices at China’s factories grew at the fastest pace in nearly 26 years in September, which could add to global inflationary pressure if local companies start passing higher costs on to consumers.

The producer price index rose 10.7% from a year earlier, beating forecasts and reaching the highest level since November 1995, as prices for coal and other commodity costs skyrocketed, the report showed. Thursday data from the National Statistics Office.

There is still little evidence that consumer goods factories are passing higher input costs on to customers, and consumer prices grew at a slower pace of 0.7% last month. However, that could change as producers see their profits shrink and China braces for higher electricity prices amid an energy crisis.

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“The widening gap between PPI and CPI means greater pressure for upstream sectors to shift rising costs downstream,” said Bruce Pang, head of macro and strategic research at China Renaissance Securities Hong Kong.

The governor of the People’s Bank of China, Yi Gang, told a Group of 20 forum that China’s inflation is “moderate,” according to a statement posted Thursday on the central bank’s website. He reiterated that monetary policy would be flexible, focused, reasonable and appropriate.

Global pressure

Countries from Latin America to Europe have experienced higher-than-usual consumer price inflation this year. US data on Wednesday showed consumer prices rose 5.4% in September from a year earlier, even as the Federal Reserve has insisted that most of the pressure on prices is a transitory effect of a global economy. emerging from the pandemic.

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

“Downstream sectors continue to absorb higher input costs as demand remains weak,” said Alicia García Herrero, chief economist for Asia-Pacific at Natixis SA, in a Twitter post. “The world will not import inflation from China anytime soon.”

The gap between China’s producer and consumer inflation increased in September to 10 percentage points from 8.7 points in August, the widest level since 1993.

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The jump in China’s PPI was mainly due to skyrocketing prices for coal and other energy-intensive products, according to the NBS. Rising coal prices and political targets to reduce energy consumption have led to electricity shortages, leading to power rationing and production interruptions in more than 20 provinces in September. Prices of other commodities such as crude oil also continued to rise, with the Bloomberg Commodity Index rising 5% for the month.

With coal futures at an all-time high and the government allowing electricity prices to rise, inflationary pressure will begin to trickle down to consumers. China’s largest soy sauce maker in the country said this week that it plans to increase the retail prices of its products. At least 13 companies listed on China’s A-share market have announced price increases this year, while tire producers said they plan to adopt new pricing policies in October, according to state media reports.

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Zhaopeng Xing, China Senior Strategist at Australia & New Zealand Banking Group Ltd., said PPI will likely hit 12% in October or November, and will be 7.5% for the full year. Consumer prices will rise modestly to 2% in the fourth quarter to reach 0.9% in 2021, it said.

The lack of pass-through to the CPI means that China still has room for monetary easing as its economy slows. Many economists still hope that the central bank will reduce the reserve requirement ratio of banks to help stimulate liquidity in the economy.

What Bloomberg Economics Says …

The dramatic divergence in two key measures of China’s inflation, with producer prices rising further and consumer prices cooling in September, highlights huge underlying strains in the economy. But for the central bank, the focus is on supporting growth. And lower CPI inflation gives you room for maneuver.

David Qu, China economist

For the full report, click here.

The bonds changed shortly after the data, and the benchmark 10-year government bond yield stood at 2.95%.

For now, consumer inflation remains under control due to falling pork prices, which helped reduce food prices by 5.2% in September from a year earlier. Core CPI, which excludes volatile items such as food and energy, which was unchanged at 1.2%.

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