Chinese inflation is likely to rise moderately in the immediate future, but will avoid an unexpected spike like that seen last month in the United States, analysts said. Still, a sharp rise in raw material prices recently will put pressure on the profit margins of Chinese firms, with some small companies at risk of going out of business. US consumer prices rose 0.8 per cent in April from a month earlier, four times what was expected, with the annual rate jumping to 4.2 per cent, the highest since September 2008. The sharp rise in consumer prices spooked financial markets, raising speculation about higher inflation across the globe. There is already evidence that higher raw material prices are pushing up product prices in China, which could result in China “exporting” inflation through higher costs for its overseas goods. On Monday, nearly 100 Chinese steel companies raised their sales prices to compensate for the high cost of iron ore, which rose to a historic high last week. Costs for the raw material have surged due to strong demand from China for infrastructure and real estate projects, as well as appetite from other countries as their economies recover from the coronavirus pandemic. China’s producer price index (PPI) – which measures the prices manufacturers charge wholesalers for their products – rose to 6.8 per cent in April , the highest rate since October 2017, in large part due to higher raw material prices. The consumer price index (CPI) rose a modest 0.9 per cent. In addition, there is already anecdotal evidence that high raw material costs are posing risks to some businesses. One firm, Guangdong Modern Castings, based in the export manufacturing hub of Guangdong, posted a notice this week that it had stopped taking new orders because it could no longer make a profit on its metal casting products. Still, most analysts remain calm about the Chinese inflation outlook. Robin Xing Ziqiang, chief China economist at Morgan Stanley Asia, predicted the country’s PPI would peak in May or June at around 8 per cent, before gradually trending down to average at 4 per cent in the second half of the year. China’s core consumer prices – excluding food and energy – would remain under control, rising from the current rate of 0.7 per cent to a still benign 1.8 per cent in the fourth quarter. “We do not expect [strong raw material prices] to translate into above-target CPI. We see relatively muted pass-through from commodity prices to CPI,” Xing said. “With consumer demand still not yet fully recovered, it would be harder for factories to pass higher costs to clients.” China warns ‘side effects’ of US economic stimulus risk causing sharp market correction China could use verbal guidance to keep a lid on commodity price risks, as well as tightening commodity trading rules on domestic exchanges, as it did in 2016-17 when regulators asked major commodity futures exchanges to bring speculative trading under control, followed by measures that included higher margin requirements, transaction fees and daily price movement limits for some products. Most analysts say the spillover to China from any risky US inflation would be limited by slowing credit expansion in the world’s second largest economy. In April, total aggregate financing – bank loans, bonds and other financing methods – was lower than expected at 1.85 trillion yuan (US$286.9 billion), while new loan growth slowed sharply to 1.47 trillion yuan. Bloomberg’s China Credit Impulse indicator of overall financial conditions dropped to just 2.9 per cent, the lowest since early 2020. The People’s Bank of China said in its first quarter monetary policy report it would keep policy unchanged in the near term, reiterating its view the nation would continue to see an uneven economic recovery, but without long term inflation risks. The central bank has been gradually reducing the amount of liquidity in the Chinese financial system, after sharply criticising US monetary policy for being too expansive and at risk of creating asset bubbles. The sharp rise in US inflation has changed the debate - at least for the time being - about the outlook for American economic stimulus policies. The massive US government stimulus enacted over the last year to combat the impact of the pandemic – more than US$4 trillion – coupled with loose monetary policy from the US Federal Reserve risks boosting consumer demand above supply, given continued constraints on global supply chains. Some analysts say that could result in further price pressures. Until this week, Federal Reserve officials have insisted the expected rise in inflation this spring would be temporary, arguing the still-high number of unemployed and underemployed in the economy means there is little risk of general wage increases ratcheting up price pressures. Michael Every, Asia-Pacific senior strategist at Rabobank, noted that the surprising rise in CPI in April was due to special factors – such as a sharp increase in used car costs because of a slowdown in new car production that was caused by a global semiconductor shortage . With industry analysts predicting the chip shortage could last well into the second half of this year, or even into 2022, it remains unclear how long this will continue to affect consumer prices.