China’s factory inflation reaches 26-year high as the power crisis hits

Birds fly over a closed steel plant where chimneys from another functioning plant are seen in the background, in Tangshan, Hebei Province, China, February 27, 2016. REUTERS / Kim Kyung-Hoon / File Photo

  • October PPI, CPI accelerates, rising faster than expected
  • Chinese companies face sky-high material costs
  • Price pressure increases fears of “stagflation”.

BEIJING, November 10 (Reuters) – China’s factory inflation reached a 26-year high in October when coal prices rose in the midst of a power crisis in the country’s industrial heartland, further pushing producers’ profit margins and raising concerns about stagflation.

The producer price index (PPI) climbed 13.5% from the previous year, faster than the 10.7% 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% forecast from analysts in a Reuters poll.

Consumer prices also rose faster, but at a slower pace than prices at the factory gate. The consumer price index (CPI) rose 1.5% in October on an annual basis, compared with September’s rise of 0.7%.

The growing price pressure complicates considerations for the People’s Bank of China, which may now be wary of injecting monetary stimulus too quickly due to concerns about rising inflation, even as growth in the world’s second largest economy slows.

“We are concerned about the breakdown from producer prices to consumer prices,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note.

Consumer prices are likely to increase in the coming months as companies face depleted inventories and are forced to pass on higher costs to customers, he added.

“The risk of stagflation continues to increase.”

Declining economic growth and rising factory inflation have led to concerns about stagflation, which may mean that China must be careful about easing monetary policy.

“Rising CPI inflation and rising PPI inflation reduce the likelihood of a PBoC policy rate cut,” said Ting Lu, China’s chief economist at Nomura.


Upstream industries led to price increases at the factory gates, with coal mining and washing prices rising 103.7% from the previous year, and prices in the oil and gas extraction industry rising 59.7%.

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

“Inflation at the factory gate is likely to be near a peak,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note citing falling coal prices.

Several Chinese food giants have announced an increase in retail prices in recent weeks, as rising production costs erode profit margins. Foshan Haitian Flavoring And Food (603288.SS), vinegar producer giant Jiangsu Hengshun (600305.SS) and frozen food company Fujian Anjoy Foods (603345.SS) all have price increases.

PPI rose 2.5% on a monthly basis, compared with a 1.2% rise in September.

Core inflation, which removes volatile food and energy prices, rose by 1.3% in October from the previous year, higher than the rise of 1.2% in September.

Reporting by Liangping Gao and Gabriel Crossley; Edited by Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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