China is getting pummeled by rising costs that have pushed producer price inflation to its highest level in nearly 13 years.
Surging inflation in the world’s factory threatens to spill over into the rest of the globe and drive prices that were already ballooning even higher. But economists also say the pressure could begin to ease soon.
The country’s producer price index — which measures the cost of goods sold to businesses — soared 9% in May from a year ago, according to government data released Wednesday. That is the fastest increase since September 2008, when China was grappling with the consequences of an overheating economy after several years of annual GDP growth of more than 10%.
High producer inflation is troubling news for China’s businesses and the country’s ongoing economic recovery from the pandemic. It means that the rising costs of raw materials are now more aggressively cutting into company profits, and could force them to control costs by slowing down production or even shedding workers. That would hurt growth in the world’s second biggest economy.
“The rising cost pressures on manufacturers, together with the bumpy recovery of downstream demand, pose downside risks to [economic] growth,” Citi analysts wrote in a Wednesday researcher note. They added that small and medium-sized businesses have been particularly hit hard by the surging costs of raw materials.
The inflated prices in China could also have global consequences, given how critical its manufacturing industry is to global trade. China’s consumer price index rose just 1.3% last month, indicating that producers aren’t passing on their costs to domestic consumers. Instead, manufacturers may attempt to pass along the burden overseas, fueling price pressures worldwide.
China has been trying to control the rising costs. The country’s top market regulators recently vowed a “zero tolerance” crackdown on commodity market speculators. Major stock exchanges in China increased trading limits and margin requirements for commodity futures, too.
Some governments have also loosened some restrictions. Late last month, for example, the steelmaking hub of Tangshan rolled back steel production curbs. And customs officials have cut import tariffs for some steel.
Beijing may be considering even more measures. Bloomberg reported Wednesday, citing anonymous sources, that the government is thinking about capping the price of coal used to fuel many Chinese power stations.
So far, the recent policies appear to be pulling back prices, at least somewhat. And economists say peak inflation might be drawing near.
Rebar, a type of steel used to reinforce concrete, has tumbled 18% from its peak level in May on the Shanghai Futures Exchange — though it is still 16% more expensive than at the end of last year.
“As Beijing has rolled out a raft of policy measures to boost domestic supply of major raw materials including coal, iron ore, steel and electricity, we have seen some moderation in raw materials prices in recent weeks,” analysts at Nomura wrote in a Wednesday note.
Producer price inflation may remain elevated in June, however, giving the rising cost of oil and persistently tight supply of raw materials. Some important ports in southern China are also dealing with Covid-19 outbreaks, which could make shipping bottlenecks worse and add further upward pressure on freight rates.