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China’s record factory door inflation fuels policy dilemma

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BEIJING (AP) – Inflation at China’s factories in September rose to a record on rising commodity prices, but weak demand limited consumer inflation, forcing formulators policy to walk a tightrope between supporting the economy and rising producer prices.

The producer price index (PPI) rose 10.7% from a year earlier in September, the National Bureau of Statistics (NBS) said on Thursday, the biggest increase since the bureau began compiling the data in 1996. Economists in a Reuters poll expected a 10.5% increase, following a 9.5% rise in August.

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Producer prices have risen due to production constraints caused by a home power shortage and a global rebound in commodity prices for months. But Chinese companies have been reluctant to pass the higher costs on to local customers due to already flexible orders.

Thursday’s data showed consumer inflation declined last month, weighed by weak demand for goods from clothing to appliances, as well as a drop in volatile food prices.

Tang Jianwei, chief macroeconomics analyst at BOCOM, said China’s mixed inflation outlook poses a dilemma for the country’s monetary authorities.

“On the one hand, relatively weak domestic demand requires a certain degree of relaxation to support the recovery in demand, and on the other hand, a record PPI restricts the room for relaxation,” said Tang Jianwei, chief macroeconomic analyst at BOCOM.

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Supporting producer prices, global commodity prices rose in recent months driven by higher demand for coal and metals as economies around the world reopened after closing due to the COVID pandemic. -19. Labor shortages and transportation bottlenecks have also driven up prices globally.

In addition to price pressures in China, widespread power outages in September disrupted production in the cement, steel and aluminum industries, and even halted production at numerous factories, including many that supply major global brands such as Apple. China’s energy crisis stems from a coal shortage amid efforts to meet decarbonization targets and record fuel prices.

Prices rose in 36 of 40 industrial sectors last month, up from 32 sectors in August, the data showed. Mining and coal prices rose 74.9%, a sharp increase from 57.1% in August.

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But the consumer price index rose 0.7% year-on-year in September, slowing from a 0.8% rise in August and below the forecast for a 0.9% rise in the Reuters poll.

“There are still bottlenecks on the supply side and demand was weak, so producers cannot pass on costs. This is a painful process for the Chinese economy to go through, ”said Zhou Hao, senior emerging markets economist at Commerzbank.

China’s economic growth is expected to slow to 5.2% year-on-year in the third quarter from 7.9% in April-June, a recent Reuters survey showed.

MEASURES

The mounting price pressures come even as Beijing has taken a series of measures to curb record coal prices and ease the country’s energy crisis, including urging coal miners to increase production and manage demand for coal. electricity in industrial plants.

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The government said last week that it will allow coal-fired power prices to fluctuate by up to 20% from base levels, a loosening of previous limits.

ANZ expects the measure to boost the overall PPI by 2 percentage points in the short term, while the impact on the CPI will be just 0.5 percentage points.

Tang said the chances of an interest rate cut or a reduction in banks’ reserve requirements this year were low, adding that the authorities would likely keep interbank liquidity reasonably ample through structural adjustments.

The People’s Bank of China has kept its benchmark rate for corporate and domestic loans unchanged for 17 months, while the last time it lowered reserve requirements was in mid-July.

Core inflation, which excludes volatility in food and energy prices, reached 1.2% in September, unchanged from August.

However, in a sign that consumer inflation is not indefinitely immune to broader price pressures, Foshan Haitian, China’s largest soy sauce maker, said this week that it plans to increase prices by as much as 7% to from October. 25 due to rising costs of raw materials, transportation and energy. (Reporting by Liangping Gao, Stella Qiu and Ryan Woo; Edited by Ana Nicolaci da Costa)

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