(April 10): China exited factory deflation after more than three years, as energy costs surged when the war in Iran disrupted swaths of global oil supply.
Producer prices rose 0.5% in March from a year earlier after a drop of 0.9% in the previous month, according to data released by the National Bureau of Statistics (NBS) on Friday. The median estimate of economists surveyed by Bloomberg was 0.4%.
But consumer inflation cooled more than expected to 1%, down from 1.3% in February, as a seasonal boost from holiday spending petered out. The core consumer price index, which excludes volatile items such as food and energy, slipped to 1.1%.
“Higher producer prices should eventually translate to reflationary momentum across the economy, which could help in the efforts to crack down on involution-type price competition,” Lynn Song, chief economist for Greater China at ING Bank, said in a report.
The market reaction was muted, probably because investors already priced in the likelihood of producer inflation returning to positive territory. The offshore yuan traded little changed at about 6.83 per dollar, while 10-year government bond yields held steady at 1.81%.
See also: A solution hidden in the side door
China has been trapped in a deflationary spiral since late 2022, as a manufacturing glut and sluggish domestic demand led to intense price wars that eroded company profits and slowed wage growth. But with energy costs soaring after the US and Israeli attack on Iran and Tehran’s retaliation, China’s factory prices climbed above zero faster than expected at the start of the year, likely ending a record streak of economy-wide deflation.
Although China is more immune to oil shocks after years of investment in renewables and efforts to secure stable supplies, the disruption of global energy flows by the conflict in the Middle East is still driving up costs for producers. China already raised gasoline prices three times by roughly a quarter since the war began on Feb 28.
The Strait of Hormuz, through which a fifth of the global oil trade passes, remains effectively shut. The US and Iran appeared to pause most strikes after fighting continued in the region following a two-week ceasefire announced on Tuesday.
See also: China considers financial aid for airlines hit by oil shock — Bloomberg
An official exit from deflation will be welcome news for policymakers in Beijing, who have vowed to “steer general price levels back into positive territory” this year. An easing of deflationary pressures also makes additional stimulus less likely.
Economists at global lenders including Goldman Sachs Group Inc no longer expect the People’s Bank of China to cut its policy rates this year — though officials also have the option of injecting liquidity into the economy by means of measures such as reducing the reserve requirement ratio.
“If this trend broadens and is supported by policies that curb predatory competition, annual CPI could drift toward the government’s 2% target,” said Hao Zhou, chief economist at Guotai Junan International in Hong Kong. “The overall scope for monetary easing will be more cautious than previously anticipated.”
But a turnaround driven by higher commodity costs doesn’t mean the economy is better off.
A one-time shock that comes without draining excess industrial capacity or revving up household spending could leave factories footing the bill. Manufacturers are already finding it difficult to pass on the higher costs to buyers and end up with even thinner profits.
In a sign of pressure on factories’ profits, purchase prices of raw materials rose 0.8% from a year ago — faster than the 0.5% gain in their selling prices. While the petroleum and natural gas extraction industry saw prices rise 5.2%, they declined 4.5% for refiners, reflecting a slower transmission of cost increases to downstream sectors.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Apart from crude oil, non-ferrous metals were also a major contributor to higher producer expenses.
Prices of metals like copper and aluminium fluctuated over the past month amid worries over global growth. But they remained far above their level a year ago, thanks to a monthslong rally driven in part by artificial intelligence-related demand.
Output prices for non-ferrous metal mining and smelting industries surged 36% and 22% in March from a year ago, respectively.
The increase in producer prices is a result of “factors including a rapid surge in global commodities prices as well as improved supply-demand relationship in certain domestic industries”, NBS analyst Dong Lijuan said in a statement accompanying the data release.
Chinese consumers are also feeling the pinch, with their transportation and communication costs becoming 0.9% more expensive than a year ago — the fastest gain since January 2023. The cost of energy needed to power vehicles rose 3.4% in March, reversing a contraction of 9% in the previous month.
But a continued fall in the price of consumer goods at the factory gate suggests broader spending by households remains weak.
A breakdown of the CPI numbers showed food inflation remained tepid at just 0.3%, partly because of a sustained decline in the cost of pork. Weak domestic demand could make it harder to pass higher factory-gate prices to consumers.
“The uptick is still fairly modest and is unlikely to prove durable,” said Zichun Huang, economist at Capital Economics. “Inflation will climb further over the next couple of months but, provided that the ceasefire announced on Tuesday doesn’t fall apart, the headline CPI rate should peak well below the PBOC’s target before dropping back under 1% by year end.”
Uploaded by Chng Shear Lane
