China’s Factory Inflation Peaks as Commodity Prices Steady

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China’s factory inflation peaked and started to ease in June as a stronger dollar and government measures helped to cool commodity prices.

The producer price index rose 8.8% from a year earlier after jumping 9% in May, the National Bureau of Statistics said Friday. That was the same as the median forecast in a Bloomberg survey of economists. Consumer prices increased 1.1% from a year ago, lower than in May and below the estimate of 1.2%.

The easing in price pressures comes against the backdrop of more subdued growth, with policy makers signaling additional support for the economy. In a surprise move this week, the government hinted it will cut the reserve requirement ratio, or the amount of money banks must keep in reserve, in order to help firms deal with the impact of rising commodity prices. This could better support small businesses and lower their financing costs, the State Council said in a statement Wednesday.

“The pullback of inflation will create a chance for the authority to ease,” said Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group Ltd in Shanghai. “Premier Li proposed a RRR cut on Wednesday and this may materialize this month.”

Global commodity prices were mostly flat in June after rallying for more than a year, with the Federal Reserve’s hawkish shift pushing the greenback higher and weighing on commodities, which are mostly priced in dollars. Chinese regulators also took a number of steps to tame prices, from requesting commodity firms cut their bullish futures bets to pledging more releases of metal reserves.

“China’s inflation pressures are mainly on the PPI side, which is actually peaking out and will come down in the second half modestly” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. China’s commodity demand will slow in the second half of the year as investment cools, while the boost from the U.S. may be smaller, driving a modest slowdown in base metal commodity prices, he said.

The inflation data was in line with the decline of both input and output prices in the official manufacturing purchasing managers’ index in June. A higher base year earlier, when the economy was starting to recover from the pandemic, also likely helped to moderate inflation.

“Producer price inflation is likely to gradually trend lower in the third and fourth quarter,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. “The gap between PPI and CPI is narrowing. Part of the reason is regulators’ measures to stabilize commodity prices, but there’s also the factor that consumer demand still remains relatively weak.”

What Bloomberg Economics Says...

Cooling prices reinforce our view that inflation won’t be a decisive consideration for the central bank. We expect the People’s Bank of China to ease liquidity conditions marginally from a current tight bias and keep interest rates steady.

David Qu, China economist

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Producer prices are forecast to slow in the third and fourth quarters of this year and through to June 2022, according to economists surveyed by Bloomberg. Meanwhile consumer prices are seen picking up over the same period.

“In June, policies to ensure the supply and stabilize commodities prices began to take effect, the relationship between supply and demand in the market is tending to improve, while the rise in prices of industrial products has slowed down,” NBS economist Dong Lijuan said in a statement accompanying the release.

Even with the flattening of global commodity costs, input prices for Chinese producers rose at a faster pace again, climbing by the most since 2008. That wasn’t passed on to downstream firms though, with the producer prices of consumer goods only up 0.3%.

Producers have been unable to pass on rising prices to consumers due to intense competition and a slow recovery in domestic consumer demand. People’s Bank of China’s Governor Yi Gang said last month that consumer inflation will stay under 2% this year, below the government’s official target of about 3%.

©2021 Bloomberg L.P.