China’s factory prices surged last month; here’s why that matters

China’s producer prices climbed in March by the most since July 2018 on surging commodity costs, adding to worries over rising global inflation as the pandemic recedes.

The producer price index rose 4.4% from a year earlier after gaining 1.7% in February, the National Bureau of Statistics said Friday, higher than the 3.6% median estimate in a Bloomberg survey of economists. The consumer price index increased 0.4% after falling for two straight months.

After months of deflation, producer prices have started to pick up sharply this year as the cost of oil, copper and agricultural goods rallies. As the world’s biggest exporter, China’s rising prices threaten to stoke inflation around the world, adding to volatility in financial markets. Inflation risks already are mounting because of a stronger recovery in the world economy, massive fiscal stimulus in the U.S. and soaring shipping costs.

“Our research has found that China’s PPI has a high positive correlation with CPI in the U.S.,” said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group Ltd. “The higher-than-expected PPI data could impact people’s judgment of inflation pressure in the U.S. and globally, and this impact shouldn’t be underestimated.”

The CSI 300 Index was down 1.5% as of 2:55pm in Shanghai. Copper futures in Shanghai inched lower, while construction steel also dropped.

What Bloomberg Economics Says …

Beneath the upswing in China’s inflation in March was a telling divergence — prices tied to commodities were major drivers, while those linked to household demand were relatively stable. There are two implications — industrial firms stand to gain from higher factor-gate prices, and consumers aren’t quite back on their feet.

— David Qu, economist

Surging Profits

Surging commodity prices have gained the attention of China’s top policy makers, with the Financial Stability and Development Committee — chaired by Vice Premier Liu He — calling this week for efforts to stabilize prices. Authorities should “keep a close eye on commodities prices,” the committee said in a statement Thursday evening.

The inflation data show consumption remains subdued, giving the central bank reason not to tighten monetary policy anytime soon, according to ANZ’s Yeung.

“If inflation pressure starts to manifest in consumer prices, policy could begin to tighten,” he said.

Consumer-price deflation in recent months was driven mainly by falling pork prices, a key component of China’s CPI basket. While prices are likely to pick up, the slow recovery in household spending means inflation will likely remain subdued. Core consumer prices, which exclude volatile energy and food costs, rose 0.3% in March from a year earlier, while food prices fell 0.7%.

“The recovery of manufacturing industry is fast, but the speed of the consumption rebound is less than ideal,” said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore. “The recovery of the services sector is not ideal either, but manufacturing is exceptionally good, meaning that manufacturing will continue to drive economic growth going forward, while services will be a drag.”

PPI increases could reach more than 7% in the next two to three months, he added.

For Chinese businesses, rising factory prices mean higher profits and more capacity to repay debt, with industrial profits jumping in the first two months of the year from the same period in 2020, recent data showed. However, purchase prices for industrial companies rose even faster in March than the price of finished goods, which could squeeze profits if it continues.