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China’s producer price index (PPI) rose by 8.3 per cent in March, down from a rise of 8.8 per cent in February. Photo: AFP

China inflation: fuel and food prices to push up consumer costs amid Covid-19 outbreak, Ukraine war

  • China’s official consumer price index (CPI) rose by 1.5 per cent in March from a year earlier, up from 0.9 per cent growth in February
  • China’s producer price index (PPI) rose by 8.3 per cent in March, down from a rise of 8.8 per cent in February

China’s headline consumer inflation may continue its steady increase in the coming months amid the disruption to economic activities caused by the ongoing coronavirus outbreaks and rising commodities prices due to the protracted Ukraine war.

The official consumer price index (CPI) slightly beat expectations by rising to a three-month high of 1.5 per cent in March from a year earlier, up from a rise of 0.9 per cent in February, data released on Monday showed.
Consumer inflation may rise further to above 2 per cent in April “as households across China have been stocking up food and other necessities after observing the fallout from the Shanghai lockdown”, Nomura analysts led by Lu Ting said.
“Looking further ahead, due to lockdowns and transport disruptions in Northeast China, the largest grain production base in China, this year’s spring planting of crops may have been delayed and the risk of food shortage may rise in the second half of this year, adding further pressure to the worsening global food shortage caused by the ongoing military conflict in Ukraine.”

Food prices fell by 1.5 per cent from a year earlier in March, narrowing from a fall of 3.9 per cent in February, while non-food prices rose by 2.2 per cent last month, year on year, up from a reading of 2.1 per cent growth in February.

China’s core consumer inflation rate, excluding the volatile prices of food and energy, rose by 1.1 per cent in March compared with a year earlier, unchanged from February.

Prices, though, rose by the fastest pace since October in seasonally adjusted month-on-month terms, according to Sheana Yue, China economist at Capital Economics.

“The main drivers were higher fuel and food prices. Core inflation was largely unchanged,” she said, with China having last month set a target for CPI growth this year at “around 3 per cent”.

Looking ahead, upward PPI inflation pressure may persist if geopolitical tensions continue to shock commodity prices globally,
Jing Liu

The prices that factories charge wholesalers for products, meanwhile, rose by 8.3 per cent in March as the growth of China’s producer price index (PPI) came in above expectations having stood at 8.8 per cent growth in February.

The year-on-year rise was the slowest since April last year, but the monthly increase of 1.1 per cent was the fastest pace in five months, up from the rise of 0.5 per cent in February.

“Looking ahead, upward PPI inflation pressure may persist if geopolitical tensions continue to shock commodity prices globally,” said Jing Liu, senior economist for Greater China at HSBC.

“On the other hand, the [National Development and Reform Commission’s] intervention on the domestic commodity market may make the road less bumpy.

“Headline CPI inflation is subject to upward pressures as the panic food purchasing may shore up food prices while energy prices stay elevated.”

The world’s second largest economy is facing a daunting task to stop an economic slowdown amid the latest coronavirus wave, which is the worst China has seen in more than two years.

Premier Li Keqiang confirmed on Friday that economic headwinds are worse than expected and pledged more measures to support the economy.
Market expectations for further monetary loosening have increased, including interest rate cuts, but any moves will add further pressure on capital outflow amid the aggressive plans by the US Federal Reserve to increase rates.
Although consumer price inflation may rise further, weak consumer demand means it is unlikely to exceed the government’s annual target of 3 per cent this year.
Sheana Yue

Nomura added that rising food and energy price inflation would limit the space for China’s central bank to cut interest rates, despite the worsening economy.

“The uncertainty caused by the war in Ukraine is likely to keep global commodity prices elevated in the near-term. But base effects mean that headline producer price inflation will continue to decline over the coming quarters,” added Yue from Capital Economics.

“And although consumer price inflation may rise further, weak consumer demand means it is unlikely to exceed the government’s annual target of 3 per cent this year.”

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