China Factory-Gate Inflation Hits 3-½ Year High

China's producer price inflation rate edged up to 8.1 percent in April from 8.0 percent in March as rises in food, energy and raw material costs pushed up factory-gate prices at the fastest rate since late 2004.

CNBC.com

The reading was below market expectations of 8.4 percent but showed that pipeline price pressures are building up and that could translate into higher retail prices.

Consumer price inflation in the year to April is likely to have risen to a near 12-year high of 8.5 percent from March's 8.3 percent pace, two sources familiar with the data told Reuters. The figures are due for release on on Monday.

"Usually it takes about six months for producer price pressure to be transmitted to consumer prices. But now the time lag is getting shorter," said Tang Jianwei, an analyst at Bank of Communications in Shanghai.

"The surge in PPI is mainly due to rises in prices for oil and metals," Tang said. "That means price pressures in the second half will be higher than the market expects."

Vice-Premier Wang Qishan said on Friday that inflation was China's biggest economic problem and reaffirmed that the government would stick to a tight monetary policy to help cool an economy that has grown by double-digits for five years.

"Together with CPI likely above 8 percent in April, it should leave pressure on the policy makers to continue efforts to limit inflation by tolerating continued appreciation of the yuan," said David Cohen with Action Economics in Singapore.

While Cohen expects interest rates to rise, Gene Ma with China Business Economic Monitor (CBEM) in Beijing sees only a 30 percent chance of an increase, in part because the authorities are increasingly worried about the impact of slower global growth on Chinese exports and jobs.

Ma said he saw no respite on the inflation front.

"Many producers, especially of raw materials, are stocking goods now. Because of the Olympics in August, the government will temporarily close some mines and polluting factories for one or two months. "This will have a big impact on raw material supplies. I see no sign of the PPI easing in the short term," he said.

The National Bureau of Statistics, which released the figures, said food prices at the producer level rose 11.9 percent in April from a year earlier; crude oil cost 37.9 percent more, steel was up 27.3 percent and prices of raw materials, fuel and power were up 10.3 percent.

The 8.1 percent rise in the producer price index matched that of November 2004 and was last exceeded in October 2004, when it was 8.4 percent.

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