China’s record factory gate inflation stokes policy dilemma

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BEIJING (Businesshala) – China’s September factory gate inflation hit a record high in commodity prices, but weak demand limited consumer inflation, prompting policymakers to strike a gap between supporting the economy and pushing producer prices forward. Was forced to walk the tight rope.

FILE PHOTO: Copper rods are seen at the Truong Phu cable factory in northern Hai Duong province, outside Hanoi, Vietnam, August 11, 2017. Businesshala/Kham/File photo

The National Bureau of Statistics (NBS) said Thursday that the producer price index (PPI) rose 10.7% in September from a year earlier, the biggest increase since the bureau began compiling the data in 1996. Economists in a Businesshala poll had expected a growth of 10.5%, after a 9.5% increase in August.

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Producer prices have risen due to a loss of output due to a home power outage and a month-long global commodity price rally. But Chinese businesses have already been reluctant to pass the high cost on to local customers because of soft orders.

Thursday’s data showed consumer inflation eased last month, driven by weak demand from clothing to home appliances, as well as a fall in volatile food prices.

BOCOM’s Chief Macroeconomics Analyst Tang Jianwei said China’s mixed inflation picture has created a dilemma for the country’s monetary authorities.

Tang Jianwei, Chief Macroeconomics Analyst at BOCOM, said, “On the one hand, relatively weak domestic demand requires some degree of easing to support demand recovery and, on the other hand, the record high PPI restricts room for easing.” “

As economies around the world reopen after closures due to the COVID-19 pandemic, global commodity prices have surged in recent months due to rising demand for coal and metals. Labor shortages and transportation bottlenecks have also driven up prices globally.

Adding to price pressures in China, widespread power cuts in September disrupted production in the cement, steel and aluminum industries, and even halted production at many factories, including several large global brands such as Apple. supplies were also included. China’s power shortage stems from a coal shortage amid efforts to meet decarbonization targets and meet record fuel prices.

Prices rose in 36 out of 40 industrial zones last month, up from 32 in August, the data showed. Mining and coal prices rose 74.9%, faster than a 57.1 percent increase in August.

But the consumer price index rose 0.7% year-on-year in September, slowing from 0.8% growth in August and well below the 0.9% growth forecast in a Businesshala poll.

“Supply side constraints remain and demand was weak so manufacturers cannot pass on the cost. This is a painful process that the Chinese economy has to go through,” said Zhou Hao, senior EM economist at Commerzbank.

China’s economic growth is expected to slow to 5.2% year-on-year in the third quarter from 7.9% in April-June, a recent Businesshala survey showed.

measures

The rising price pressure comes even as Beijing has taken several measures to curb record-high coal prices and ease the country’s electricity shortage, including increasing production from coal miners and reducing power demand at industrial plants. Including the urge to manage.

The government last week said it would allow prices of coal-fired power to fluctuate up to 20% above the base level, easing previous limits.

ANZ expects the move to increase the headline PPI by 2 percentage points in the short term, while the impact on the CPI will be only 0.5 percentage points.

Tang said interest rate cuts or a reduction in banks’ reserve requirements were unlikely this year, adding officials would likely keep interbank liquidity well enough through structural adjustments.

The People’s Bank of China has kept its benchmark rate for corporate and domestic loans unchanged for 17 months, while last reducing reserve requirements in mid-July.

Core inflation, which separates volatile food and energy prices, reached 1.2% in September, unchanged from August.

However, in a sign that consumer inflation is not indefinitely immune to broader price pressures, Foshan Haitian, China’s largest producer of soy sauce, said this week it is expected to increase prices by up to 7% from October 25 due to rising costs. ‘s plan. for raw materials, transportation and energy.

Reporting by Liangping Gao, Stella Qiu and Ryan Wu; Editing by Ana Nicolasi da Costa

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