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China’s surging factory prices add to global inflation risks

China’s surging factory prices add to global inflation risks
Business
China’s factory-gate prices surged more than expected in April, fuelled by rapid gains in commodity prices, adding to global inflation concerns.

The producer price index rose 6.8 per cent from a year earlier, its fastest pace since October 2017, following a 4.4 per cent gain in March, the National Bureau of Statistics said Tuesday. The median forecast was for a 6.5 per cent increase. Consumer prices increased 0.9 per cent on year, slightly below the one per cent gain projected by economists.

The commodities boom, driven by rising global demand and supply shortages, has stoked concerns about inflation around the world. With China being the world’s biggest exporter, its rising cost pressures for the nation’s factories pose another risk to global inflation as manufacturers start passing on higher prices to retailers.

Surging factory prices stem from “a combination of domestic and international factors,” said Iris Pang, chief economist for Greater China at ING Bank NV. They include strong domestic demand for raw materials due to continued momentum of infrastructure and property projects in China, as well as expectations of higher material prices globally thanks to the U.S. infrastructure building plan, Pang said.

China’s central bank said PPI (producer price index) may be boosted in the second and third quarters by gains in commodity prices, although the surge will likely stabilize later amid an increase in global production. The risks of imported inflation are overall controllable because the higher price of raw materials have little impact on the consumer price index, the People’s Bank of China said in its first-quarter monetary policy report published Tuesday evening.

Asian stocks and U.S. equity futures slid Tuesday after a technology-led Wall Street tumble as surging commodity prices stoked concern about inflation. A U.S. CPI report Wednesday is also forecast to show a strong gain in April.

The NBS said the gain in producer prices was due to a steady recovery in domestic production and rising prices of iron ore and non-ferrous metal. Consumer inflation, meanwhile, remained relatively subdued amid lower pork prices, a key element in the country’s CPI (consumer price index) basket.

Central bankers from the U.S. Federal Reserve on down maintain that recent price gains are temporary. In China, policy makers insist the impact of commodity prices on the domestic economy will be limited and that price growth remains generally under control. Still, officials have pledged to strengthen controls on the raw-materials market to limit costs to companies.

The widening gap between CPI and PPI “suggests an uneven recovery of the economy,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group Ltd. “Despite the commodity boom, the service sector has yet to catch up.” Wages are lagging and the central bank will likely keep its policy stance “largely neutral,” he said.

The People’s Bank of China is seeking to scale back the stimulus it pumped into the economy during the pandemic last year, worried by the build up of debt. Economists expect policy makers to slow the pace of credit expansion rather than raise interest rates. The Communist Party’s Politburo, China’s top decision-making body, said last month there won’t be any sharp reversal of macroeconomic policies.

China aims to keep consumer inflation at around three per cent this year, but an NBS official said in a recent interview that the headline index is expected to be “significantly lower” than the official target in 2021.
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