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China's factory inflation hits 26-year high as power crunch bites

By Reuters   November 10, 2021 | 01:15 am PT
China's factory inflation hits 26-year high as power crunch bites
Birds fly over a closed steel factory where chimneys of another working factory are seen in the background, in Tangshan, Hebei province, China, February 27, 2016. Photo by Reuters/Kim Kyung-Hoon
China's factory gate inflation hit a 26-year high in October as coal prices soared amid a power crunch in the country's industrial heartland, further squeezing profit margins for producers and heightening stagflation concerns.

The producer price index (PPI) climbed 13.5 percent from a year earlier, faster than the 10.7 percent rise in September, the National Bureau of Statistics (NBS) said in a statement.

It matched a pace not seen since July 1995 and was faster than the 12.4 percent forecast by analysts in a Reuters poll.

Consumer price rises also quickened, although at a slower pace than factory gate prices. The consumer price index (CPI) rose 1.5 percent in October year-on-year, compared with September's 0.7 percent rise.

The mounting price pressures complicate deliberations for the People's Bank of China, which may now be wary of injecting monetary stimulus too quickly amid concerns about fanning inflation, even as growth in the world's second-largest economy slows.

"We are concerned about the pass-through from producer prices to consumer prices," said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note.

Consumer prices will likely speed up in coming months as firms faced depleted inventories and are forced to pass higher costs onto customers, he added.

"The risk of stagflation continues to rise."

Slowing economic growth and soaring factory inflation have fuelled concerns over stagflation, which could mean China has to move cautiously on loosening monetary policy.

"Rising CPI inflation and elevated PPI inflation reduces the probability of a PBoC policy rate cut," said Ting Lu, Chief China Economist at Nomura.

Power sting

Upstream industries drove factory gate price rises, with coal mining and washing prices surging 103.7 percent from a year earlier and prices in the oil and gas extraction industry rising 59.7 percent.

Restrictions on carbon emissions and soaring prices of coal, a key fuel for electricity generation, led to power rationing and production cuts in recent months, although coal prices have since fallen after government intervention.

"Factory gate inflation is probably close to a peak," said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note, citing coal price falls.

Several Chinese food giants have announced increases in retail prices in recent weeks, as rising production costs erode profit margins. Foshan Haitian Flavouring And Food, vinegar producer giant Jiangsu Hengshun and frozen food firm Fujian Anjoy Foods have all hike prices.

The PPI inched up 2.5 percent on a monthly basis, compared with the 1.2 percent uptick in September.

Core inflation, which strips out volatile food and energy prices, stood at 1.3 percent rise in October from the previous year, higher than the 1.2 percent uptick in September.

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