China Factory Inflation Picks Up on Rising Commodity Prices

(Bloomberg) -- China’s factory inflation accelerated faster than expected in May as the price of commodities such as crude oil and metals increased.

The producer price index rose 4.1 percent from a year earlier, compared with a projected 3.9 percent increase in a Bloomberg survey of economists and a 3.4 percent gain in April. The consumer price index climbed 1.8 percent in May, the statistics bureau said Saturday, matching economists’ forecast and the previous month’s increase.

While accelerating PPI and milder consumer inflation may sustain margins for some of China’s smokestack industries, there’s no sign of a lasting rebound. The producer price gauge is forecast to ease to a 3.3 percent gain this year from the 6.3 percent increase last year that helped support global reflation.

“The commodity rally was both due to strong oil prices and stable domestic demand,” said Larry Hu, a Hong Kong-based economist at Macquarie Securities Ltd. “The economy has held up well in the second quarter, but will gradually slow in the second half of this year.”

Prices of products from crude oil and natural gas extractors surged 7.5 percent in May from a month earlier, while a robust steel market boosted metal prices, the NBS said in a statement released with the data.

“This provides room for the authorities to clean up the debts of zombie enterprises,” said Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd. in Hong Kong. Still, Yeung expects the central bank will reduce reserve requirements to shrink the balance sheet.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net;Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, ;Malcolm Scott at mscott23@bloomberg.net, John McCluskey

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