China inflation: record factory prices amid power crunch add to risks facing world’s No 2 economy

16-Oct-2021 Intellasia | South China Morning Post | 5:02 AM Print This Post

China’s record-high level of factory gate inflation has increased the risk of stagflation, but surging coal prices that have forced factories to charge more for their products are unlikely to keep rising at the same pace for much longer, analysts said.

China’s energy crisis is accentuating economic problems posed by elevated coal prices, which helped push the producer price index (PPI) from 9.5 per cent year-on-year growth in August to a new high of 10.7 per cent in September.

The increase in factory-gate prices last month beat analysts’ expectations in a Bloomberg survey who had predicted a rise to 10.5 per cent year-on-year and topped the previous record of 10.1 in September 2008.

The pickup was largely driven by a 74.9 per cent year-on-year increase in the coal mining sector last month, up from a rise of 57.1 per cent in August, the National Bureau of Statistics (NBS) said.

Dong Lijuan, a spokeswoman for the bureau, said “factors such as rising prices of coal and some energy-intensive industries” were behind the expansion, adding that of the 40 industrial sectors surveyed, 36 saw price hikes.

“Inflation surprised on the upside. We think the risk of stagflation is rising in China as well as the rest of the world,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, referring to an economic situation in which prices keep rising but economic activity stagnates.

“The ambitious goal of carbon neutrality puts persistent pressure on commodity prices, which will be passed to downstream firms. Persistent inflationary pressure limits the potential scope of monetary policy easing. government bond yields have been rising in the US and China, which to some extent reflects the risk of inflation.”

Rising commodity prices have been blamed for the sharp rise in PPI this year after the index rose by just 0.3 per cent in January from a year earlier.

But China’s energy crisis is adding more pressure, with economists warning that Beijing’s decision to allow electricity prices to rise to ease the worsening crisis will add to inflation pressures at the same time the economy is slowing.

China will release its third quarter gross domestic product figures on Monday, but there are already signs the world’s second largest economy is slowing after an impressive recovery from its first quarter contraction in 2020, with various analysts downgrading their outlooks.

While factory gate inflation has hit new highs, there are few signs it is feeding through to higher output prices of consumer goods, according to Sheana Yue, assistant economist at Capital Economics.

This was reflected in China’s official consumer price index (CPI), which rose by only 0.7 per cent in September from a year earlier, down from a gain of 0.8 per cent in August. This was below the Bloomberg survey median, which had predicted an unchanged reading.

Beijing has set a 2021 CPI growth target of around 3 per cent, compared with around 3.5 per cent last year.

“The overall inflation outlook remains benign, with PPI inflation likely to drop back around the turn of the year and CPI inflation set to remain muted for the foreseeable future,” said Yue.

“Factory gate inflation won’t stay this high for long. Admittedly, coal prices may remain elevated in the near-term. But they are unlikely to keep rising at last month’s rapid pace.

“If power rationing persists then it could start to feed into higher consumer goods prices. But with pork prices still falling, food deflation looks set to remain considerable for a while. As such, headline consumer price inflation should remain below 2 per cent in the coming quarters and is unlikely to constrain the [People's Bank of China's] ability to loosen monetary policy.”

Food prices fell by 5.2 per cent from a year earlier in September, down from a fall of 4.1 per cent in August. This was largely due to the price of pork a staple meat on Chinese plates falling by 46.9 per cent compared with a year earlier in September.

Non-food prices rose by 2 per cent in September, year-on-year, up from a reading of 1.9 per cent in August, while China’s core consumer inflation rate, excluding volatile food and energy prices, rose by 1.2 per cent in September compared with a year earlier, unchanged from August.

Speaking at a Group of 20 meeting on Wednesday and in comments released after the data was released China’s central bank governor, Yi Gang, said the nation’s overall inflation picture was benign, and monetary policy would be more flexible, targeted and reasonable to support economic development.

China’s state planner on Wednesday said it would boost local coal output and raise imports to ensure sufficient supply through winter.

Data released on Wednesday also showed China’s coal imports surged 76 per cent year-on-year in September as power plants scrambled for fuel.


Category: Taiwan

Print This Post

Comments are closed.