China Factory Prices Rising Fastest in 5 Years Adds to Reflation

• China Factory Prices Rising Fastest in 5 Years Adds to Reflation

China’s producer price index rose at the fastest pace in more than five years in December as the factory to the world swings from being a drag on global inflation to another potential force pushing prices higher.

The Details

• PPI jumped 5.5 percent last month from a year earlier, compared to the median estimate of 4.6 percent in a Bloomberg survey and the 3.3 percent gain in November
• Consumer-price index rose 2.1 percent, versus 2.2 percent gain forecast by analysts

Big Picture

Only four months out of a multi-year factory deflation, the world’s second-largest economy is poised to export inflation to nations around the globe through its supply chains as manufacturers squeezed by higher input costs raise asking prices. Whether that rebound will be sustained hinges on how the global economy fares under a Donald Trump presidency and whether trade tensions flare between the U.S. and China.

Economist Takeaways

“Reflation continues in the factory sector,” said Julia Wang, an economist at HSBC Holdings Plc in Hong Kong. “The stable CPI suggests that the reflation is confined mostly in the industrial sector and hasn’t filtered into the real economy. So the PBOC would possibly not respond to it until inflation expands to the real economy.”

“Producer prices rose faster than we expected in the last quarter, but that may have over-stated the strength,” said Harrison Hu, chief greater China economist at NatWest Markets, a unit of Royal Bank of Scotland Group Plc. Hu expects PPI to peak this quarter, while consumer inflation will quicken slightly this year. “The PBOC would like to see subdued inflation with PPI stronger than the CPI so that companies are more able to pay off debts.”

“High commodity prices will delay the government effort to deal with over capacity,” Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Producers are tempted to fire the engine again.”

The Details

• Among producer prices, those for mining surged 21.1 percent in December from a year earlier while raw materials increased 9.8 percent
• Purchasing prices climbed 6.3 percent from a year earlier, led by fuel and metals
• Consumer prices of food climbed 2.4 percent, while non-food prices increased 2 percent