China’s Factory Inflation Jumps as Officials Warn of Risks

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After months of deflation, producer prices have started to pick up sharply this year as the cost of oil, copper and agricultural goods rally. That’s gained the attention of top policy makers, with the Financial Stability and Development Committee chaired by Vice Premier Liu He calling for efforts to stabilize prices this week. Authorities should “keep a close eye on commodities prices,” according to a statement released Thursday evening after the committee met.

As the world’s biggest exporter, rising prices in China threaten to stoke global inflation further and add more turmoil to financial markets. Inflation risks are already 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. “The higher-than-expected PPI data could impact people’s judgement of inflation pressure in the U.S. and globally, and this impact shouldn’t be underestimated.”

“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,” he said, adding that the PPI growth rate could surge to over 7% in the coming two to three months.

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 than the price of finished goods in March, which may squeeze profits if it continues.

Consumer-price deflation in recent months was mainly driven by falling pork prices, a key component of the 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% in March from a year ago.

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