China’s April PPI Spike Raises Inflation Risks

Influenced by two factors, rising commodity prices and a low base with the same month last year, China’s ex-producer prices rose more than expected in April, the biggest increase in three and a half years, amid concerns that inflationary pressures could spread globally.

On Tuesday (May 11), the National Bureau of Statistics of the Communist Party of China (NBSC) announced that the producer price index (PPI) rose 6.8% year-on-year in April, the largest monthly increase since October 2017; it rose 4.4% in March, against a median estimate of a 6.5% rise. The consumer price index (CPI) rose 0.9% year-over-year, up slightly less than the 1% rise economists had expected.

The CPI is an inflation indicator that tracks the prices of a basket of goods and services, and the PPI is a measure of the ex-factory prices of industrial goods.

The Wall Street Journal reported on May 11 that disruptions in global supply chains and a rebound in some emerging markets hit by the Communist Party’s virus outbreak drove up commodity prices, which in turn squeezed the profit margins of Chinese producers. During the epidemic, Chinese producers expanded their share of global exports, and overseas market demand remains strong this year.

(Foshan Oufeng Furniture Co.) Managing Director Thomas Broertjes said orders surged about 30 percent last month even though the company raised prices 3 percent this year because of rising labor and material costs in China.

Broertjes said, “Our margins are a little less now and our costs are higher.”

If Chinese producers have strong bargaining power, then higher prices for Chinese products have the potential to ripple through global inflation, according to Zhang Ning, an economist at UBS (UBS).

A price index for Chinese imports of goods to the U.S. has been climbing since the outbreak, rising to its highest level since December 2018 in March, according to the U.S. Bureau of Labor Statistics.

Bloomberg reported that Peng Aiyao, chief economist for Greater China at ING Bank NV, said the spike in Chinese producer ex-factory prices stemmed from a “combination of domestic and foreign factors,” including strong domestic demand for raw materials from the continued momentum of China’s infrastructure and real estate projects, and higher global material prices due to the U.S. infrastructure plan. Global material prices are expected to rise.

Many economists expect China’s PPI to continue to climb in the second quarter as supply shortages are likely to persist in the near term.

Some economists have warned that higher producer prices during the CCP virus outbreak could be passed on to consumers more quickly.

Xing Zhaopeng, an economist at investment bank ANZ in Shanghai, said the Communist Party virus outbreak has brought consolidation in sectors such as transportation and catering, enhancing the pricing power of some producers. He also said ANZ expects China’s CPI to rise above the official target level of 3 percent by the end of this year.

ANZ chief China economist Yang Yuting said the widening scissors between CPI and PPI “indicates an uneven recovery.