China Feb producer inflation fastest in nearly 9 years as commodities surge

CNBC with Reuters
China PPI related to commodity prices: Economist

China's producer price inflation accelerated to its fastest pace in nearly nine years in February and by more than expected as prices of steel and other raw materials extended a torrid rally, boosting profits for industrial companies worldwide.

Consumer inflation, however, cooled more than expected to its slowest pace since January 2015, leaving some analysts puzzled about the strength of the broader economy.

The producer price index (PPI) jumped 7.8 percent in February from a year earlier, compared with a 6.9 percent increase in January, the National Statistics Bureau (NSB) said on Thursday. Analysts had expected a 7.7 percent gain, a Reuters poll showed.

Producer price inflation "was largely driven by proactive fiscal policies, market speculation and overcapacity reduction policies," Zhou Hao from Commerzbank in Singapore wrote in a note, referring to a sharp increase in government infrastructure spending and a months-long rally in commodities futures markets.

"We have yet to see any significant pass through effects from PPI inflation to CPI inflation, which means that China's economy is not on a solid footing."

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Similar to previous months, gains in the PPI were driven largely by mining and heavy industry, with a 36.1 percent leap in mining, the biggest jump in that category since early 2010.

Raw materials increased 15.5 percent, while oil refiners and chemical producers also saw solid increases.

China's iron ore and steel prices have been rallying for a year, fueled by a construction boom, though worries are growing over rapidly rising stockpiles at Chinese ports. The country's insatiable demand for resources has helped spur an inflationary pulse in commodities markets worldwide.

However, while factory surveys show manufacturers have been able to pass on some of the higher production costs by raising prices of their goods, there has been scant evidence of it flowing through to consumers yet.

China's consumer inflation rate slowed to 0.8 percent in February from a year earlier as food prices fell following the long Lunar New Year celebrations. The CPI for January and February combined rose 1.7 percent.

"Although February's CPI slowdown was relatively large, CPI is still relatively steady when food and energy prices are taken out of the equation," statistician Sheng Guoqing said.

The stats bureau attributed the slowdown in consumer inflation to the Lunar New Year and cold weather.

Analysts polled by Reuters had predicted the consumer price index (CPI) would rise 1.7 percent, versus a 2.5 percent acceleration in January.

China's consumer inflation remains well within the central bank's comfort zone, but expectations of eventual upward pressure could keep the central bank on a gradual tightening path.

"Very high PPI inflation will pass through to CPI inflation. Generally, inflation pressure is on the rise; as we can see, commodities prices, Chinese service prices, rental costs are all rising very rapidly," Shen Jianguang, Mizuho Securities chief economist for Greater China, told CNBC's "Street Signs".

The government is targeting 3 percent consumer inflation for 2017, unchanged from last year, Premier Li Keqiang said in his annual government work report on Sunday.

Even though CPI is expected to rise in March, it will likely come in below 1.5 percent from a year ago, said Nomura analysts. They also expect PPI inflation to moderate in March.

"Entering March, commodity prices showed signs of moderation. This, together with the end of a low base, is likely to lead PPI inflation to ease in March," wrote Nomura economists Yang Zhao and Wendy Chen in a note Thursday.

They added PPI will peak in the first quarter of the year with CPI inflation remaining "mild".

"Right now, inflation seems not to be a concern for monetary policymakers," they added.

China has cut its economic growth target to a more modest 6.5 percent this year to give policymakers more room to push through painful reforms to address a rapid build-up in debt. Li has pledged to build a "firewall" against financial risks.