China’s producer prices rose at the fastest pace in more than two years in February, joining more expensive oil, computer chip shortages and soaring shipping costs as tailwinds for global inflation pressures.
The Chinese producer price index rose 1.7% from a year earlier, official data showed Wednesday, stronger than economists’ forecasts for a 1.5% increase and up from 0.3% in January. Consumer prices fell 0.2% last month from a year earlier, slightly better than a projected 0.3% decline.
As manufacturer to the world, resurgent producer prices in China raise the prospect it will start exporting inflation globally as factories hike prices for goods sold abroad. Bond markets have already been roiled by expectations that faster global growth and massive fiscal stimulus in the US will push up inflation.
Chinese producer prices have been a major contributor to global inflation in recent decades as supply chains became more integrated. Falling prices were a key disinflation driver in 2012-2016, and made it difficult for central banks elsewhere to meet their goals of sustained inflation.
This time around, inflation risks are moving in the other direction. Oil has surged close to $70 a barrel, while prices of copper and agricultural goods have rallied. Shipping rates have soared and a global shortage of computer chips could push up prices.
“Metal prices were on the rise due to global fiscal stimulus money to be spent on infrastructure projects,” said Iris Pang, chief economist for greater China at ING Groep NV in Hong Kong. “If crude oil price keeps increasing it would push up other prices, like transportation, and therefore production cost, then it could generate inflation.”
The benchmark CSI 300 Index was up 0.9% at 1:04pm in Shanghai, after dropping more than 5% over the past two days. The yuan, which has gained about 0.2% in value this year against the dollar, was 0.1% weaker. Rising commodity prices were the main boost to China’s producer inflation last month. The biggest gains were in mining, which climbed 6.8% in February from a year ago, while raw material prices rose 2.9% after several months of declines.
“Producer price inflation looks set to pick up further on a low base, assuming commodity prices remain buoyant. This would support increases in profits for industrial enterprises – a positive for the economy”, says David Qu, China economist at Bloomberg. However, the government’s conservative economic growth goal of more than 6% for this year, and its gradual withdrawal of stimulus mean China could play a lesser role in driving demand for commodities this year than in the years following the global financial crisis.
“China may play a less dominant role in exporting global inflation, given that the government’s on the course to tighten fiscal stimulus and property measures,” said Michelle Lam, Greater China economist at Societe Generale in Hong Kong.
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