Producer inflation rockets to 6.9%, fueled by costly oil

Inflation continues to rise beyond expectations in China, sending forecasters to their knees in anguish. Investors are left wondering just how the central bank will dole out cash in the coming year to keep growth on track but avoid stoking another massive ramp-up in real estate prices.

The latest price report came just days after Beijing said its foreign trade surged in January, with imports notably climbing 16.7% versus a year ago, led by substantially higher unit cost paid for incoming shipments of iron ore, coal and crude petroleum.

Imported oil cost 46.7% more in January, compared with a year ago. Iron ore prices are up 81.3% while coal prices more than doubled, the General Administration of Customs said last Friday.

Strong Chinese demand for global commodities undoubtedly fueled the sharp recovery in raw material prices since early 2016.

As of now, the surge in commodity prices is clearly making its way across factory floors in China, and in fact, at a pace much faster than anticipated.

The Producer Price Index, a barometer for ex-factory selling prices across more than 20,000 industrial items, jumped to 6.9% from the previous level of 5.5%. Economists were looking for a smaller rise of 6.3%.

Higher PPI could signal a better business outlook for manufacturers as they enjoy rising selling prices. The thorny issue at hand appears to be that price recoveries aren’t evenly spread out across the entire production chain in China.

Mining PPI, the highest level of upstream inflation, marched to 31.0% from December’s already high 21.1%. The next level down, which is the raw materials PPI, rose to 12.9% from 9.8%, while the price index for downstream processing-type manufacturing edged higher only by less than a percentage point to 5.9%, from 5.1%.

Higher prices of commodities are already costing China roughly US$10 billion more in import bills every month, and the latest PPI report exposes the little-discussed fact that pricing power of Chinese producers gets weaker as one moves down the supply chain.

CPI reached 2.5% on festive food and travel

The January reading of the Consumer Price Index also rose, to 2.5% from December’s 2.1%, and still ahead of market consensus for 2.4%.

Higher food prices accounted for a large chunk of the CPI gain, which is typical for a month covering Chinese New Year. Food prices can be expected to decline in the coming months.

Travel-related prices were a second major category that also got a major boost from the week-long national holiday. Flight tickets surged 18.6% from a year ago, while tour agency fees were up 11.1%.

This proves that Chinese consumers have been most willing to splurge on travel and entertainment as the Year of the Rooster arrives. At 9.9%, inflation for the broad category of travel is the second highest in the past 15 or so lunar new year holidays.

I went home last weekend for a delayed Spring Festival family reunion, and the flight ticket was indeed only a third what I would have paid to travel smack bang on new year’s eve. The price was definitely right for an economical economist sitting in economy class. And while the inflight meal could have been better, no matter, there were plenty of scrumptious snacks awaiting us in Taipei.