Economy Apr 09

China factory gate price jump raises global inflation concern

After worries last year that the world’s second-largest economy was on the verge of a deflationary spiral, inflation is now the watchword

China factory gate price jump raises global inflation concern
Photo: Reuters

(ATF) In the second-half of last year economists feared China was teetering on the brink of a deflationary death spiral.

Not they’re worried about the exact opposite.

Factory prices hit a more than two-year high in March, data showed Friday, highlighting the country's strong recovery but feeding concerns it could filter through to the global economy just as central banks battle to maintain ultra-loose monetary policies and low interest rates.

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China's producer price index (PPI), which measures the cost of goods at the factory gate, expanded a forecast-beating 4.4 percent on-year last month, the National Bureau of Statistics said.

The figure was "due to factors such as rising international commodity prices" including crude oil and iron ore, and boosted by an "increase in domestic industrial production and investment demand", said NBS senior statistician Dong Lijuan.

Analysts had expected the rise in PPI given the low base of comparison last year, when lockdowns and strict movement controls were imposed to stamp out Covid-19.

Fuelling concern

PPI had contracted for much of last year, in defiance of repeated data that showed China’s economy was pulling strongly out of a first-quarter contraction at the height of the Covid epidemic in the country. 

Now it’s another data point fuelling concern that global prices will spark an inflationary jump as vaccinations pull the US and other major economies out of their own Covid downturns. As the world’s biggest exporter, inflationary fears generated by China have been greater than for most other economies. 

Observers said the rises could cause a headache for global central banks, which are already trying to temper potentially disastrous inflation with accommodative monetary policies.

But Nomura chief China economist Lu Ting noted that this time, surging commodity prices have been "mainly driven by monetary easing and huge fiscal stimulus – especially in the US – outside China".

"As the world's largest exporter of manufactured goods, higher PPI inflation in China will be inevitably passed to other economies," he said.

The Federal Reserve has led the pack in pledging repeatedly that even if inflation does spike, it will not lift its record-low interest rates until the US economy is back on track. Still, investors are not totally sold, and yields on US Treasuries – a gauge of future rates – are sitting near one-year highs.

Raymond Yeung at Australia and New Zealand Banking Group added: "Our research has found that China's PPI has a high positive correlation with (consumer prices) in the US.

"The higher-than-expected PPI data could impact people's judgement of inflation pressure in the US and globally, and this impact shouldn't be underestimated.”

  • Reporting by AFP

China economy PPI inflation