Raw materials fuel producer price inflation

PUBLISHED : Tuesday, 11 September, 2007, 12:00am
UPDATED : Tuesday, 11 September, 2007, 12:00am

Producer price inflation in the mainland picked up pace for the first time in four months in August as raw material costs increased.

The figure sets the stage for a set of macroeconomic indicators for last month, including the consumer price index and the trade surplus due as soon as today.

Although a pillar of the consumer price index is foodstuffs, many economists worry that the inflationary trend on factory-gate prices will add fuel to the already sizzling economy.

The producer price inflation rose 2.6 per cent from a year earlier, compared with a 2.4 per cent gain in July and the fastest since May's 2.8 per cent, according to the National Bureau of Statistics.

Non-ferrous metal products led August's price increases at 12.2 per cent, while food gained 8.6 per cent compared with 7.8 per cent in July and raw materials rose 3.9 per cent, slowing from 4.3 per cent.

'The inflationary trend is still in the pipeline,' Bank of East Asia chief economist Paul Tang Sai-on said.

The export-led economy grew an annualised 11.9 per cent in the second quarter of this year as industrial production jacked up costs of resources such as coal, copper and steel.

Some economists blamed the increases on inefficiency in factories, especially those in the western and remote parts of the country, which added to prices of resources, energy and raw materials.

Steeper increases in producer prices plus a continuing rise in meat prices were expected to have sent the nation's consumer price inflation to a fresh peak last month, economists said.

A Bloomberg poll of 24 economists showed a consensus of 5.9 per cent growth in last month's consumer price inflation while the trade surplus may have widened 38 per cent to US$25.9 billion.

'For the time being, people are focused on food inflation,' said Credit Suisse chief regional economist Tao Dong.

'What we see is inflation spilling beyond food into other areas', such as wages.

American fast-food chain McDonald's lifted wages of the majority of its 45,000 mainland workforce an average 30 per cent on September 1, the first increase in 17 years.

Pork prices, which rose 64 per cent last week from a year earlier on dwindling supply, would continue to hover at high levels in coming months as winter spurred consumption, the Ministry of Commerce said.

'The consumer price index will continue to rise,' Mr Tao said. 'It can potentially be a serious issue.'

Beijing may have to raise interest rates substantially and to rapidly restore real interest rates to positive territory, he said.

Citi China economist Shen Minggao, who estimated the August trade surplus at a record US$28.9 billion, said global appetite for mainland goods would continue to outpace domestic demand.