China’s inflation bogey comes back to life as food and factory prices rise

Inflation is coming back to life as a major concern for China’s economic decision makers, with the latest official data pointing to a pickup in consumer and factory prices.

Producer prices were surprisingly strong in October, suggesting the world’s second-largest economy remained robust despite expected curbs on factory output as the government tries to put a lid on smog. The producer price index rose 6.9 per cent in October from a year earlier, in line with growth in September when it hit a six-month high, according to the National Bureau of Statistics.

Consumer inflation also picked up pace last month, accelerating to 1.9 per cent from 1.6 per cent in September, due to higher food prices and a low base. The inflation figure was well within Beijing’s full-year target of 3 per cent but a persistent rise in the consumer price index could narrow Beijing’s scope for monetary or fiscal easing.

The CPI excludes property prices and gives nearly a third of its weighting to food prices, and so has become less relevant to Chinese households. But it is still the only inflation indicator included in the government’s annual work report.

Morgan Stanley Huaxin Securities chief economist Zhang Jun said higher food prices were driving up consumer inflation but the gauge was unlikely to surpass 2 per cent this year and could stay slightly above 2 per cent next year.

“Such a level of inflation is not enough for the Chinese central bank to make a dramatic change to its monetary policy and deploy strong tools like an interest rate rise,” Zhang said.