China Producer Prices Jump, Adding to Global Inflation Risks

China’s producer prices rose at the fastest pace in more than two years in February, joining more expensive oil, computer chip shortages and soaring shipping costs as tailwinds for global inflation pressures.

The Chinese producer price index rose 1.7% from a year earlier, official data showed Wednesday, stronger than economists’ forecasts for a 1.5% increase and up from 0.3% in January. Consumer prices fell 0.2% last month from a year earlier, slightly better than a projected 0.3% decline.

As manufacturer to the world, resurgent producer prices in China raise the prospect it will start exporting inflation globally as factories hike prices for goods sold abroad. Bond markets have already been roiled by expectations that faster global growth and massive fiscal stimulus in the U.S. will push up inflation.

China Producer Prices Jump, Adding to Global Inflation Risks

Chinese producer prices have been a major contributor to global inflation in recent decades as supply chains became more integrated. Falling prices were a key disinflation driver in 2012-2016, and made it difficult for central banks elsewhere to meet their goals of sustained inflation.

This time around, inflation risks are moving in the other direction. Oil has surged close to $70 a barrel, while prices of copper and agricultural goods have rallied. Shipping rates have soared and a global shortage of computer chips could push up prices.

“Metal prices were on the rise due to global fiscal stimulus money to be spent on infrastructure projects,” said Iris Pang, chief economist for greater China at ING Groep NV in Hong Kong. “If crude oil price keeps increasing it would push up other prices, like transportation, and therefore production cost, then it could generate inflation.”

The benchmark CSI 300 Index was up 0.9% at 1:04 p.m. in Shanghai, after dropping more than 5% over the past two days. The yuan, which has gained about 0.2% in value this year against the dollar, was 0.1% weaker.

Commodity Boom

Rising commodity prices were the main boost to China’s producer inflation last month. The biggest gains were in mining, which climbed 6.8% in February from a year ago, while raw material prices rose 2.9% after several months of declines.

What Bloomberg Economics Says...

Producer price inflation looks set to pick up further on a low base, assuming commodity prices remain buoyant. This would support increases in profits for industrial enterprises -- a positive for the economy.

-- David Qu, China economist

For the full report, click here.

China Producer Prices Jump, Adding to Global Inflation Risks

However, the government’s conservative economic growth goal of more than 6% for this year, and its gradual withdrawal of stimulus mean China could play a lesser role in driving demand for commodities this year than in the years following the global financial crisis.

“China may play a less dominant role in exporting global inflation, given that the government’s on the course to tighten fiscal stimulus and property measures,” said Michelle Lam, Greater China economist at Societe Generale SA in Hong Kong. “The recent commodity price upswing to a very large extent is responding to the recovery in major advanced economies on the back of vaccination and Covid-19 containment.”

Consumer Prices

Consumer deflation in China eased last month, with prices still largely dragged down by cheaper pork, a key element in the country’s CPI basket. Pork prices declined 14.9% in February from a year ago, reflecting the recovery in hog supplies after outbreaks of African swine fever in recent years.

That trend could reverse with the re-emergence of the disease in parts of the country. However, the statistics bureau reduced pork’s weighting in the CPI basket last month, and with consumer spending still a weak point in an otherwise strong economic recovery from the coronavirus pandemic, consumer inflation will likely remain below Beijing’s target of a 3% increase this year.

Excluding the volatile energy and food costs, consumer prices were unchanged from a year earlier.

“The weak CPI shows that there’s no obvious inflation pressure, unlike in the U.S., where CPI expectations have been revised up,” said Hao Zhou, senior emerging markets economist at Commerzbank AG in Singapore.

Subdued inflation reduces pressure on the People’s Bank of China, the country’s central bank, to tighten monetary policy, said Peiqian Liu, a China economist at Natwest Markets in Singapore. However, the PBOC has warned about financial risks, such as asset bubbles, suggesting a policy of gradual tightening.

“We think the PBOC may continue to normalize monetary policy to neutral as credit growth slows gradually in coming months,” she added.

©2021 Bloomberg L.P.

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