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.

Julian Evans-Pritchard, China economist at Capital Economics, said price pressures in China appeared strong on the back of still-rapid economic growth, a tight labour market, capacity cuts and temporary disruptions to industrial production.

“Price pressures may remain strong for a while longer as the anti-pollution campaign keeps commodity prices elevated and this feeds through into core inflation,” he said.

While China’s economy has surprised financial markets and investors with robust growth, driven by a renaissance in long-ailing “smokestack” industries such as steel this year, property and construction activity, two of the economy’s main growth drivers, are starting to slow due to higher borrowing costs and government measures to cool heated housing prices.

Some analysts have flagged a tightening monetary policy outlook given the economy expanded nearly 6.9 per cent in the first nine months of the year and is on track to comfortably meet the government’s 6.5 per cent target.

“The rise of inflation momentum seemingly points to further tightening bias in monetary policy,” Commerzbank analyst Zhou Hao said.

As northern China enters the heating season this month, the government has stepped up its fight against smog, ordering many steel mills, smelters and factories to curtail or halt production over the winter.

Producer price inflation of raw materials eased only marginally to 9 per cent last month compared to 9.1 per cent in September, the NBS said. Industries such as oil and gas recorded stronger price gains of 5.1 per cent last month.

China’s economy is expected to cool to 6.7 per cent in the fourth quarter and is likely to grow 6.8 per cent for this year, accelerating for the first time in seven years, a Reuters poll suggests.

Additional reporting by Reuters