China’s factories are facing their fastest price rises in years while consumer inflation slips further below 1%, a split that points to squeezed margins and fragile domestic demand rather than any healthy reflation.
The producer price index rose 5.7% from a year earlier in October, well above economists’ forecasts of around 5.3% and up from 5% in September, when it had already reached a four-year high, according to data from the National Bureau of Statistics reported by Reuters. Consumer prices increased 0.7% year on year, slightly below the 0.8% forecast and down from 0.9% in September. They were flat on the month, in line with expectations, after a 0.2% gain in September. Core inflation, which strips out food and energy, eased to 0.8% from 1%, also undershooting forecasts of 0.9%.
The divergence between the two measures has now widened to around five percentage points. Producer prices are being driven higher by energy and other input costs, while consumer prices show little sign of following. That suggests manufacturers and retailers are absorbing much of the cost increase rather than passing it on, a reflection of soft domestic demand and limited pricing power.
Food was the main force holding consumer prices down. Food prices fell 2.9% from a year earlier, a steeper drop than in September, pulling the headline consumer rate down by about half a percentage point, the statistics bureau’s chief statistician Dong Lijuan said. Energy-related industries, meanwhile, contributed more than 80% of the monthly gain in producer prices.
For policymakers, the mix is awkward. Weak consumer and core inflation strengthens the case for further support for domestic demand. The jump in producer prices, though, limits room for aggressive easing and squeezes industrial profit margins at a time when firms are already facing higher energy costs. For the first ten months of the year, consumer prices averaged 0.9% higher than a year earlier and producer prices 2.7% higher.
Attention now turns to October trade data due on Tuesday, which will show whether export strength can continue to offset sluggish domestic demand. Credit and money supply figures follow later in the week.
Sources: Reuters; FXStreet; InvestingLive; National Bureau of Statistics of China.
