China’s consumer prices are rising as Covid leads to food stocks

Prices of fresh vegetables rose by 24% year-on-year in April as consumers filled up to prepare for potential home orders. Pictured here is a delivery driver for Alibaba’s Hema Fresh supermarket in Beijing on May 10, 2022.

Jade Gao | Afp | Getty pictures

BEIJING ̵[ads1]1; China’s consumer and producer prices rose more than expected in April, according to data from the National Bureau of Statistics published on Wednesday.

The consumer price index rose by 2.1% last month from a year ago, strengthened by an increase in energy and fresh vegetables. The reading topped expectations for a 1.8% increase in a Reuters poll.

April’s figures were also the highest since November’s pressure of 2.3% and well above the 18-month average of 0.9% consumer price inflation. China’s official CPI target for 2022 is “around 3%”.

“The main driver was a rise in food prices due to rising transportation costs and demand from tighter Covid restrictions,” Goldman Sachs analysts said in a report Wednesday.

“In year-over-year terms, we expect CPI inflation to rise and PPI inflation to fall on the bottom,” the report said. “Sequential CPI inflation may moderate in the short term as inflationary pressures from food prices may ease with the improved Covid situation in China.”

Since March, mainland China has tightened travel restrictions and imposed orders to stay at home in many parts of the cities to limit the country’s worst Covid outbreak since early 2020. Controls have prevented many factories from producing at full capacity or moving goods between suppliers and customers.

Prices of fresh vegetables rose by 24% from year to year in April, while prices of fresh fruit increased by 14.1% during that time. Pork prices, a major contributor to China’s CPI, showed a relatively rare increase of 1.5% from the previous month for a more moderate fall of 33.3% from year to year.

Fuel prices for transport rose by 28.4% from the previous year, reflecting recent increases in oil and commodity prices.

Weak consumer demand

However, China’s rising consumer price index does not mean that locals are facing the same pressure as Americans.

US consumer prices have risen the most since the early 1980s, even when food and energy were removed. The April figure, which comes later on Wednesday, is estimated to stay close to the decade-high increase of 8.5% seen in March.

In China, excluding food and energy prices, the consumer price index rose by 0.9% in April from a year ago.

In the longer term, analysts warn that general consumer demand in China remains depressed due to uncertainty about future revenues.

Some companies have even cut prices to attract buyers.

The Caixin Services PMI for April – a monthly sentiment survey – found that companies cut prices at the fastest pace since May 2020, “with a number of firms lowering their fees to attract new business amid subdued demand,” it said in a release.

A similar survey among manufacturers found that despite a sharp increase in production costs, sales prices increased only modestly as companies tried to remain competitive and attract new businesses.

Factory costs are still high

In April, China’s producer price index moderated for the fourth month in a row, rising 8% year-on-year. It was still above Reuters’ forecast for a 7.7 percent increase.

Within PPI, purchase prices rose much faster than so-called factory door prices – the price of goods sold from factories for further production or sale to distributors.

This is an indication that cost pressures are unevenly distributed across industries, said Bruce Pang, head of macro and strategy research at China Renaissance.

He said this means that different companies will face different types of impact on their profit margins.

There is an “urgent need” for monetary and fiscal policy to provide targeted support to companies severely affected by the pandemic, Pang said in Chinese, translated by CNBC.

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China’s central bank and other governments have announced a number of measures to support growth in recent weeks, although the extent of these measures has generally disappointed markets.

“Covid shutdowns have eroded the effectiveness of policy easing, dampening demand more than supply,” Morgan Stanley chief economist Robin Xing and a team said in a note Tuesday.

At the end of April, the company cut its GDP target for China to 4.2% based on expectations that Covid controls will disrupt supply chains for longer. This is down from the previous forecast of 4.6 per cent.

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