China’s factory gate inflation soars to 26-year high on energy crunch

Factory gate prices in China rose at their fastest pace in 26 years in October, as crippling power shortages and record commodity prices hit the world’s second-biggest economy. China’s official producer price index increased 13.5 per cent compared with October 2020, according to figures released by the National Bureau of […]

Factory gate prices in China rose at their fastest pace in 26 years in October, as crippling power shortages and record commodity prices hit the world’s second-biggest economy.

China’s official producer price index increased 13.5 per cent compared with October 2020, according to figures released by the National Bureau of Statistics on Wednesday, its biggest monthly jump since 1995.

The gain exceeded the 12.4 per cent rise forecast by analysts polled by Reuters, and outpaced September’s 10.7 per cent reading, which was also the highest since 1995.

Factory gate prices refer to the cost at which wholesalers buy materials from producers, not taking into account transport and distribution fees.

The acceleration in producer prices coupled with weakening manufacturing activity has raised fears of stagflation, complicating the country’s economic outlook as slowing growth poses a challenge to President Xi Jinping’s sweeping reforms of China’s business landscape.

Rising commodity prices have also compounded the country’s energy woes. China is battling soaring coal prices after flooding in critical mining regions and the government’s clean energy goals reduced output, while widespread power rationing led to a second monthly contraction in manufacturing activity in October.

Dong Lijuan, a senior statistician at China’s NBS, said the October PPI rise had resulted from the “tight supply of crucial domestic energy and raw materials”.

Dong noted that rising oil prices, which last month topped $85 a barrel in the US, and coal, which reached Rmb2,301 ($360) a tonne in China, had contributed to the increase.

Production material prices increased 17.9 per cent in October compared with the same period last year, Dong added, while prices in the coal mining and washing industries rose 103.7 per cent.

But analysts at Citi forecast that PPI inflation was nearing a peak and would not remain elevated.

And recent measures to contain spiralling costs, including coal miners’ pledges to cut prices as well as the waning energy crisis would help to damp inflationary pressures, analysts said.

“Stagflation concerns should ease ahead,” the Citi analysts wrote in a note.

Still, some expect that central bankers in Beijing might be forced to provide more support to counter the slowing economic momentum.

“We expect the [People’s Bank of China] to have more loosening bias for the rest of the year to buffer the economic slowdown,” said Jing Liu, a China economist with HSBC.

Consumer price inflation also rose faster than economists had forecast in October, hitting a 13-month high.

China’s CPI was up 1.5 per cent year on year, and 0.7 per cent compared with September. The cost of fresh vegetables jumped 16.6 per cent, further underpinning concerns that surging production costs were feeding in to essential goods.

But Zhaopeng Xing, a China strategist with ANZ, said households’ slowing disposable income as well as mobility restrictions imposed to curb renewed outbreaks of Covid-19 would limit consumer rises.

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