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China Factory-Gate Inflation Nears Four-Year Peak

China's factory-gate inflation inched up to 8.2 percent in May, nearing a four-year high, suggesting that any moderation in consumer inflation in coming months may be limited.

The increase in the producer price index was a touch below market expectations of 8.3 percent but was up from 8.1 percent in April as food, energy and raw material costs all surged at a double-digit pace.

China, Chinese Flag
CNBC.com
China, Chinese Flag

It was the tenth straight month of accelerating producer prices and was the highest reading since October 2004.

Consumer inflation, however, looks to be moving in the opposite direction. Two sources familiar with the data told Reuters that it dropped substantially in May to 7.7 percent from 8.5 percent in April.

The consumer price index will be released on Thursday.

"CPI will not necessarily go back up again, but the slowdown in the next 6-12 months will be fairly modest because of the PPI," said Jun Ma, chief China economist with Deutsche Bank in Hong Kong.

Stubbornly high inflation has been the biggest economic worry of Chinese leaders throughout this year.

The central bank signaled its concern on Saturday with an aggressive one percentage point increase in banks' reserve requirements to sop up some of the cash in the economy that is helping to force prices higher.

That tightening step, which ties up deposits that banks could otherwise lend out, was interpreted as surprisingly harsh by investors and triggered a steep fall in China's stock markets.

The country's benchmark index briefly dipped below the psychologically important level of 3,000 on Wednesday but later pared back losses.

Silver Lining

Investors remained worried that inflation -- and the policy tightening prompted by it -- will not fade away so easily, but at least some took the modest rise in factory-gate prices as a positive sign.

"Higher commodity prices are dampening consumption, which will then make it hard for prices to tick up further," Li Huiyong, an economist at Shenyin and Wanguo Securities in Shanghai, said.

Soaring global commodity prices are vexing China, as they are all countries that are net importers. Fuel, power and raw material prices increased 11.9 percent in May from a year earlier, up slightly on the previous month.

"Inflation pressure remains elevated on rising prices of energy and raw materials. We expect the government to stick to a tightening mode," economists Ting Lu and TJ Bond at Merrill Lynch in Hong Kong wrote in a note to clients.

Offering some respite to inflation-weary China, though, was a clear slowing in food price rises in May, as that category in the PPI index dipped to 11 percent from 11.9 percent in April.

Food has been far and away the biggest driver of inflation in China, and the easing of prices for producers is likely to benefit consumers too.