Inflation out of Chinese factories slows, outlook clouded by continued high prices

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Copper rods are seen at the Truong Phu Cable Factory in northern Hai Duong Province, outside Hanoi, Vietnam, August 11, 2017. REUTERS / Kham / File Photo

  • Analysts expect PPI to hover high in second half
  • Data suggests limited pass-through of prices to consumers
  • Government worries about impact on small businesses, possible policy easing
  • June PPI + 8.8% yoy from over-decade high of 9.0% in May
  • June CPI + 1.1% y / y vs + 1.3% survey, + 1.3% in May

BEIJING, July 9 (Reuters) – Inflation at China’s factory exits eased in June after a government crackdown on commodity prices, but the annual rate remained uncomfortably high and highlighted mounting tensions on the economy as Beijing tries to bolster a post-coronavirus recovery.

Still high inflationary pressures in the industrial sector prompted the Chinese cabinet this week to signal possible policy easing measures, mainly to support small businesses.

Data from the National Bureau of Statistics (NBS) on Friday showed that the Producer Price Index (PPI) rose 8.8% from the previous year, up from a 9.0% increase in May, and in line with analysts’ expectations in a Reuters poll.

The SNB also released data on consumer price inflation, which showed a slowdown last month and limited pass-through from high prices exiting the factory.

The PPI, a benchmark indicator of a country’s industrial profitability, rose 0.3% on a monthly basis, down sharply from a 1.6% increase in May, as the prices of the copper and steel fell.

The monthly slowdown comes as China, the world’s largest consumer of coal and iron ore, has stepped up efforts to curb soaring metal prices. The measures included selling supplies from state reserves and launching an investigation into illegal storage and rising prices. Read more .

“The domestic policy aimed at securing supply and stabilizing prices in the commodity sector shows a first effect, leading to an improvement in market supply and demand and a slowdown in the price gains of industrial products. “said Dong Lijuan, senior statistician at NBS. in a statement accompanying the publication of the data

Still, some analysts believe government crackdown will have only a limited impact due to a persistent imbalance between tight supplies and growing demand from more countries recovering from the pandemic.

“The PPI continued to hover at a high level in June and we did not see a significant pullback,” said Wang Jun, chief economist of Zhongyuan Bank, adding that he expects the PPI trended above 7% year-on-year in the second half of the year. of the year.

“Despite recent changes in commodity prices, we cannot rule out that price gains will accelerate again in the second half of the year. We must remain vigilant against the possibility of a new spike in inflation upon exiting factories.”

Hao Zhou, senior emerging markets economist for Asia at Commerzbank, expects the PPI to remain around 8-9% in the second half of the year, given the recent strength in international crude oil prices.

POLITICAL SUPPORT?

Chinese officials are increasingly concerned about the negative impact of rising commodity prices on many small businesses, which are unable to pass the higher costs on to consumers.

This in turn fueled wider concerns that the post-COVID recovery of the world’s second-largest economy was stalled.

To help companies cope with rising commodity prices, the country’s cabinet on Wednesday raised the prospect of timely reductions in the amount of liquidity banks must hold in reserve, which would be the first such measure since. April of last year, when the economy was severely shaken by the covid19 pandemic. Read more

Price gains have slowed in annual terms in the oil and gas extraction and ferrous and non-ferrous smelting and processing sectors, the statistics agency’s Dong said.

Many analysts expect pent-up demand for COVID to peak and China’s growth rates to begin to moderate in the second half of the year, weighed on by weakening exports, surging inflation in producer prices and Beijing’s continued crackdown on the real estate market.

NBS data also showed that China’s Consumer Price Index (CPI) rose 1.1% in June in annual terms, slower than a 1.3% gain reported by the poll. Reuters, indicating limited pass-through of high industrial prices to consumers.

Pork prices, a key component of China’s CPI, have fallen in recent months, pushing food prices down 1.7%. Concerned about falling pork prices, authorities also announced at the end of last month their intention to buy pork for state reserves.

Annual average Chinese consumption inflation is expected to be less than 2% this year, central bank governor Yi Gang said last month, well below the government’s target of around 3%. Read more

Core inflation, which wipes out volatile food and energy prices, stood at a moderate 0.9% in June, unchanged from May, a potential source of concern for consumers. decision makers because it suggests that underlying demand remains weak.

“In our view, the high PPI inflation reading is the result of constraints on the supply side, so we expect Beijing to look to easing – rather than tightening – to contain the surging commodity prices and supporting growth, ”Nomura analysts said.

“Low CPI inflation, although largely due to falling pork prices, also gives Beijing a place to relax.”

Reporting by Liangping Gao, Stella Qiu and Ryan Woo Editing by Shri Navaratnam

Our standards: Thomson Reuters Trust Principles.


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