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China consumer and producer prices rise faster than expected in September

China's inflation stepped up in September, with prices rising more than expected for both consumers and producers in a surprising signal of economic strength.

Consumer prices rose 1.9 percent on-year in September, while producer prices surprised by rising 0.1 percent on-year, the first increase since 2012.

The consumer price index (CPI) had been expected to rise 1.6 percent on-year and the producer price index (PPI) was expected to slip 0.3 percent, according to forecasts from a Reuters poll of economists.

In August, consumer prices rose by a lower-than-expected 1.3 percent on-year, while producer prices fell 0.8 percent.

The data is watched for cues on the health of the Chinese economy as it transitions from a manufacturing base toward consumption. Producer price deflation had been slowing in recent months as commodity prices have come off their lows and a recovery could signal improved corporate profitability.

"The PPI actually had been improving for quite a while and this time it turned positive," Alex Wong, director of asset management at Ample Capital, told CNBC's "Squawk Box" on Friday. "That showed the capacity consolidation has been doing some progress. So I think that will be helpful at least for the manufacturing sectors."

The Australian dollar jumped in the wake of the data, rising as high as $0.7603, compared with around $0.7553 before the release. China is a key export market for Australia.

A worker polishes steel coils at a factory of Dongbei Special Steel Group in Dalian, China.
China Daily | Reuters

Other analysts also pointed to a positive signal from the inflation increase.

"An uptick in inflation, if sustained, would be good news for China's ability to service its overhang of corporate debt," Bill Adams, senior international economist at PNC Financial Services, said in a note on Friday.

"Higher prices for heavy industrial products will provide China's heavily indebted corporations with more top line revenue. With low interest rates keeping debt service costs in check and producer prices rising, the outlook for Chinese industrial profits is improving."

The price data followed signs of slowing activity on the mainland. Data released Thursday showed exports tumbled 10.0 percent in dollar terms in September and imports fell 1.9 percent, coming in well below forecasts from a Reuters poll for a 3.0 percent fall in exports and a 1.0 percent rise in imports. That data could signal waning demand in China and abroad, potentially weighing on China's economic growth.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter