Surge in China’s Factory-Gate Prices Adds to Inflation Worries
China’s factory-gate prices jumped by the most in 3½ years in April, driven by surging commodities prices, raising concerns that inflationary pressures could spread globally.
The country’s consumer-price index, a measure of inflation that tracks prices for a basket of goods and services, rose 0.9% in April from a year earlier, reaching a seven-month high. The producer-price index, a gauge of factory-gate prices, rose 6.8% last month, the fastest pace since October 2017, China’s National Bureau of Statistics said Tuesday.
The producer figure was higher than the median forecast of 6.5% among economists polled by The Wall Street Journal. The consumer number was in line with expectations.
A prolonged disruption in global supply chains and the resurgence of Covid-19 in some emerging markets fueled commodities prices’ climb. That in turn pinched profit margins for Chinese producers, who gained share in global exports during the pandemic and saw overseas demand continue to boom this year.
“If the bargaining power of Chinese producers is strong, there is a certain possibility that the rise in Chinese product prices will spill over onto global inflation,” said Zhang Ning, an economist at UBS.
An index of import prices of goods from China to the U.S. has climbed since the start of the pandemic and rose to the highest level since December 2018 as of March, according to the U.S. Bureau of Labor Statistics.
Many economists expect China’s producer-price index to continue to climb through the second quarter before moderating in the second half of this year, as supply shortages may persist in the near term. Robust demand for consumer goods, disruption of mining operations in countries such as South Africa and global shipping delays could boost the rally in some commodities.
A global shortage of semiconductor chips will further increase prices for a variety of products including home appliances, cars and computers, economists say.
And some warn that elevated producer prices could be passed onto consumers more quickly in the pandemic economy.
Covid-19 prompted consolidation in sectors including transportation and catering, giving some producers stronger pricing power, according to Zhaopeng Xing, a Shanghai-based economist with investment bank ANZ. He added that the bank expects China’s consumer-price index to surpass the government target of 3% by the end of the year.
While rising costs of raw materials have squeezed profit margins for many Chinese producers, demand has remained largely intact, said Robin Xing, chief China economist at Morgan Stanley in Hong Kong. Supply constraints in many Western countries, coupled with government stimulus, prompted China’s exports to surge unexpectedly by 32.3% compared with a year ago in April.
“Chinese policy makers are in no rush to raise interest rates,” said Morgan Stanley’s Mr. Xing. “Any drastic tightening will cause a double whammy for producers by adding to their cost burdens.”
Top Chinese politicians were already concerned about the surge in raw-materials costs. In April, Premier Li Keqiang and Vice Premier Liu He both stressed the need to stabilize commodities prices to help companies’ costs. The country’s campaign targeting high-polluting industries such as steel mills has aggravated supply constraints and further pushed up prices of some commodities.
In the southern province of Guangdong, orders at Foshan Oufeng Furniture Co. surged by around 30% last month, even after the company raised prices 3% this year because of rising labor and materials costs in China, said Thomas Broertjes, the managing director. The company, which exports outdoor furniture to Europe, has had record sales this year with Western buyers spending savings accumulated during the pandemic.
“We take a little bit less margin now and our cost is higher,” Mr. Broertjes said. “A 3% rise is still nicer than 7% for our clients.”
Though the gap between factory-gate and consumer prices shows that the recovery in the world’s second-largest economy remains unbalanced, consumer spending is showing signs of catching up. Domestic tourists made a record number of trips over the five-day Labor Day holiday in May, while movie box offices logged record revenue.
Still, the rebound in headline consumer price inflation remains subdued amid lower pork prices, and economists widely expect it to stay moderate in the coming months.
Food prices declined 0.7% in April from a year earlier, while nonfood prices rose 1.3%, according to the statistics bureau. China’s core consumer-price index, which strips out more volatile food and energy prices, rose 0.7% in April from a year earlier, compared with a 0.3% gain in March.