China inflation: consumers set to feel ‘stronger’ knock-on effect of rising factory-gate prices

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There are early signs that upstream producers in China may have started to pass on rising costs to downstream businesses – a shift that was underscored when both the consumer and factory-gate indices beat expectations on Wednesday, although analysts do not expect this to be a long-term trend.

China’s consumer inflation index (CPI) last month rose by 1.5 per cent from a year earlier, up from 0.7 per cent in September, although analysts say the “pass-through” of a higher producer price index (PPI) to consumers is likely to be temporary and a reaction to the recent power crunch.

But they also concede that higher raw material prices, which have plagued mainly the metals-dependent industries, are now starting to spread into consumer goods industries as well.

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“The pass-through from PPI to CPI becomes stronger. Looking ahead, PPI inflation may stay elevated for a while, likely through the winter. Energy prices, especially for coal and natural gas, may continue to rise,” said Jing Liu, senior economist for Greater China at HSBC.

“CPI inflation may pick up further from the current level of 1.5 per cent, as more price pressure shifts from PPI to CPI,” Liu added. “Yet, we expect the CPI to stay below the target of 3 per cent. We expect the People’s Bank of China to have more loosening bias for the rest of the year to buffer the economic slowdown.”

Some food companies, however, have announced price hikes of up to 15 per cent for goods such as vinegar, while over the past week in China some isolated cases of panic buying emerged after a government notice advised households to stock up on daily necessities.

The higher rise in CPI in October – the fastest pace since September 2020 – was driven by a 16.6 per month-on-month rise in the price of vegetables caused by “rainfall, crop rotation between summer and autumn, sporadic [coronavirus] outbreaks and rising costs in production and logistic”, according to National Bureau of Statistics statistician Dong Lijuan.

The pass-through has been limited until recently. Firms managed to use their inventories of inputs as a buffer to avoid passing the higher costs to their customers before, but their inventories have been depleted

Zhiwei Zhang

With China’s PPI rising at the fastest pace in 26 years in October after increasing by 13.5 per cent from 10.7 per cent in September, firms may soon be forced pass on more of their increased costs to customers.

“The risk of stagflation continues to rise. We are concerned about the pass-through from producer prices to consumer prices. The pass-through has been limited until recently. Firms managed to use their inventories of inputs as a buffer to avoid passing the higher costs to their customers before, but their inventories have been depleted,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

“We have seen more firms hiking their retail prices in recent months. The pass-through will likely become more visible in the coming months and push up the CPI. This may limit the room for monetary policy easing by the People’s Bank of China in 2022.”

Concerns about stagflation, which occurs when an economy is hit by slow growth as well as high inflation and unemployment, had already been ignited by China’s overall economic picture after gross domestic product grew by just 4.9 per cent in the third quarter.

Xu Hongcai, deputy director of the economic policy commission under the China Association of Policy Science, said that the cause of the higher CPI was the price pressure transferred from upstream producers as PPI hit its 26-year high, although the rise of consumer inflation also resulted from higher vegetable prices and a seasonal jump in demand.

“In the short term, the high level of PPI has caused great pressure on the production and operating costs of the manufacturing industry in the middle and downstream, of course, it also affects economic growth and employment, which requires a high degree of attention to,” he said. “But it is too early to say that there is stagflation.”

The PPI increase is expected to turn moderate this month thanks to falling prices in coal and steel, although an immediate turnaround is unlikely, he added.

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“[PPI] is likely to maintain the trend of staying at a high level in the first quarter and the first half of next year,” he said.

“[The transmission from PPI to CPI] is also likely to continue to take place for some time to come, but the rebound in CPI will become moderate … a steep increase is unlikely.”

Premier Li Keqiang last week offered help to struggling small and medium-sized enterprises (SMEs) by saying China needs to lower fees and taxes for businesses.

China’s SMEs account for 80 per cent of urban employment in the country, but have been struggling with lockdowns, high raw material prices and soaring freight costs, and some have found production to be no longer economically viable.

October’s PPI increase was largely driven by a 103.7 per cent year on year rise in the coal-mining sector, up from a rise of 74.9 per cent in September.

Rising commodity prices have been blamed for the sharp rise in PPI this year, with China’s energy crisis adding further pressure.

But China’s energy crisis is seemingly easing, and with a number of provinces this week announcing they are scraping power rationing, “factory gate inflation is probably close to a peak”, according to Julian Evans-Pritchard, senior China economist at Capital Economics.

“Producer price inflation continued to surge and reached a new high last month. But this largely reflects temporary disruptions in a handful of industries from energy shortages, which are already easing. There are still few signs of wider price pressures, and we think PPI inflation is likely to drop back in the coming months while CPI inflation looks set to remain muted for the foreseeable future,” he said.

China’s 2021 inflation


Consumer price index (CPI)

Producer price index (PPI)































Source: National Bureau of Statistics

China’s core consumer inflation rate, excluding volatile food and energy prices, rose by 1.3 per cent in October compared with a year earlier, up from a rise of 1.2 per cent in September.

Food prices fell by 2.4 per cent from a year earlier in October, up from a fall of 5.2 per cent in September. The increase was driven by a 15.9 per cent rise in the price of fresh vegetables in October from a year earlier, up from a fall of 2.5 per cent in September.

The price of pork – a staple meat on Chinese plates – fell by 44 per cent compared with a year earlier in October.

Non-food prices rose by 2.4 per cent in October, year on year, up from a reading of 2 per cent in September.

Additional reporting by Orange Wang

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