Global Consumers Won’t Emerge Unscathed After Huge Hike in Chinese Producer Prices

Global inflation signals just got worse. Chinese producers are seeing the biggest price hike in 26 years and may pass on the inflation to domestic and foreign consumers in 2022, according to a report from BCA Research, Institutional Investor’s sister company. 

China’s producer price index rose by 13.5 percent in October compared to the same period last year, the country’s National Bureau of Statistics said on Wednesday. The Bureau attributed the price increase to the tightened domestic supply of energy and raw materials. The consumer price index surged by 1.5 percent in October, compared to October 2020. It’s the second month of increases, with the CPI rising 0.7 percent in September. 

The large gap between the PPI and CPI data paints a “puzzling” inflationary outlook in China, according to Garry Evans, chief global asset allocation strategist at BCA Research. It suggests that Chinese companies have yet to pass on the input costs to domestic consumers, who have been spending less money because of recent Covid-19 surges and lockdowns. 

But Chinese producers will eventually transmit the inflationary pressure to consumers, according to Jing Sima, BCA’s chief China strategist. In a strategy report that came out today, Sima noted that “core CPI is only a notch below its pre-pandemic level” and will be pushed up next year.

Consumer durable goods, for example, have already gotten more expensive as a result of rising raw material costs. Prices for utilities like electricity and fuel have also reached multi-year highs. “If the 20 percent increase in electricity costs among Chinese manufacturers is passed onto consumers, it could potentially push up the CPI by about 0.2 to 0.4 percentage points,” Sima wrote. 

Because the price of electricity has gone up so much, Chinese manufacturers can no longer absorb the rising costs and might export it to global consumers, Sima added during an interview with Institutional Investor. The Chinese government has been paying a large part of the electricity bill for Chinese exporters, and that’s why “U.S. consumers were able to buy Chinese goods at a cheaper price,” Sima said. But the effect of the subsidy has become minimal as the price of energy skyrocketed.”

“The exporters have to find a way to export the inflation,” Sima said. “They've passed on the inflation to domestic consumers. They will do the same to global consumers, too.”

China’s producer price index is likely to remain at high levels at least until early 2022, according to Sima. For one, the mining sector might experience rising demand after the recent supply shortages in electricity. The shortages have prompted some Chinese provinces to impose power rationing in the past few months. But the “capital-intensive nature” of the mining sector suggests that it will take some time for producers to ramp up output, which could lead to rising prices.

Another factor behind the elevated PPI is a labor shortage, Sima added. Because the Chinese government has been implementing strict travel restrictions for Covid-19 outbreaks, many workers – most of whom migrate from the countryside to urban areas to take manufacturing or construction jobs – have stayed in their hometowns. BCA’s data shows that the number of migrant workers is down by 2 million compared to the pre-pandemic level.

“China’s authorities will [be] unlikely [to] use policy measures to cool domestic demand, but they will be constrained by lingering inflationary risks driven by external consumption and supply-side pressures in the next six months,” the report concluded. “Monetary and fiscal policies will ease to counter the slowdown in the economy, but reflationary measures will be gradual.”