Chinese factory inflation hit its highest level in a quarter of a century due to soaring commodity prices last month, with Thursday’s figures raising concerns that higher prices could creep in in supply chains and in the global economy.
The reopening of closures around the world has increased demand for energy as stocks are low, compounded by China’s willingness to meet its environmental targets by reducing its emissions targets.
The Producer Price Index (PPI), which measures the cost of goods leaving the factory, hit 10.7%, the National Bureau of Statistics said, marking the biggest jump in its data going up to October 1996.
The index had already hit a 13-year high in August, reflecting soaring commodity prices – and increased pressure on companies.
Many factories have been forced to shut down due to power outages caused by emission reduction targets, soaring coal prices and supply shortages.
Chinese authorities have since ordered mines to increase production, and energy companies have demanded that there be an adequate supply of fuel for the winter.
“In September, affected by factors such as higher prices for coal and some energy-intensive industrial products, the rise in prices for industrial products continued to expand,” NBS senior statistician Dong Lijuan said in a statement.
Dong added that among the 40 industrial sectors studied, 36 saw their prices increase, including coal mining, which rose 74.9%.
So far, there are “some signs” that power shortages are fueling the prices of finished consumer goods, said Sheana Yue, assistant economist at Capital Economics.
The Consumer Price Index (CPI), a key indicator of retail price inflation, reached 0.7% in September, down slightly from August.
The NBS said pork prices – which previously fueled a peak in the CPI – fell 46.9% on an annual basis.
But Zhiwei Zhang, chief economist at Pinpoint Asset Management, warned that with soaring prices and economic growth showing signs of slowing, “the risk of stagflation is increasing in China as well as the rest of the world.”
“The ambitious goal of carbon neutrality exerts persistent pressure on the prices of raw materials, which will be passed on to downstream companies,†Zhang added.
Beijing has set a goal of peaking carbon emissions by 2030 and becoming carbon neutral by 2060.
As authorities look for ways to ease the energy crisis, economists warn of the risk of worsening factory inflation.
The country’s cabinet, the State Council, said this month that electricity prices would be allowed to rise by up to 20% from a benchmark – double the level of the current cap – which would help make it profitable for electricity producers to increase supply. .
But such a move adds to inflationary pressures, leaving authorities with the complicated task of trying to control prices while also needing to stimulate the declining economy. Third quarter GDP data is expected next week.
ANZ Research senior Chinese strategist Zhaopeng Xing said the move to cap electricity prices was likely to boost the overall PPI and warned that the September reading would “not be its peak,” predicting higher figures in October or November.
Yue, however, expects factory exit inflation to moderate, saying “prices for coal and metals should come down as housing construction slows.”
Analysts had previously warned of an impending blow from the power crisis on other aspects of the Chinese economy such as foreign trade, with supply disruptions potentially filtering supply chains.
It comes as central banks around the world begin to slow down the ultra-accommodative monetary policies put in place at the start of the pandemic, which were critical to supporting economies but are now helping to fuel inflation.
Concerns over China’s real estate sector have also seen the People’s Bank of China pump more money into the market in recent weeks.
The government has tried to stop the risk of overflow from faltering Chinese real estate giant Evergrande, which is mired in a quagmire of $ 300 billion debt.