China Factory Price Up Following Energy Price Rise
Three and a half years of deflationary pressure
on Chinese factories reversed course last month as higher energy prices cycled into
the economy.
·
End of Deflation Trend:
o
China’s producer prices (PPI) rose 0.5%
in March (YoY), reversing a decline that lasted since September 2022.
o
Indicates a turning point in wholesale price
trends.
·
Key Driver – Middle East Conflict:
o
War involving Iran and disruptions in the Strait
of Hormuz pushed up oil and commodity prices.
o
Increased costs of inputs like energy and aluminum.
·
Commodity Supply Impact:
o
Persian Gulf supplies (e.g., aluminum)
disrupted → global shortages and higher prices.
o
China, being a major importer, is directly
affected.
·
China’s Previous Problem – Deflation:
o
Falling wholesale and consumer prices had:
§ Reduced
corporate revenues
§ Suppressed
wages
§ Created
risks of deflation (broad price decline)
·
Limited Benefit for Manufacturers:
o
Price rise driven mainly by higher imported
input costs, not demand.
o
→ Margins may not improve significantly.
·
Consumer Inflation Still Weak:
o
Consumer prices rose only 1% in March (down
from 1.3% in February).
o
Reflects weak domestic demand.
·
Structural Demand Issues:
o
Ongoing housing market slowdown dampens
consumption.
o
Oversupply in sectors like pork (prices at 8-year
low) keeps inflation subdued.
·
Global Spillover Risk:
o
Rising costs in China may increase export prices,
affecting countries like the U.S.
o
Supply chains via Vietnam and Mexico could transmit
inflation globally.
·
Policy Sensitivity:
o
Chinese authorities are cautious about deflation
risks.
o
Public discussion on deflation has even been
restricted.
·
Key Takeaway:
o
China is shifting from deflationary pressure to
cost-push inflation, but weak demand limits broader economic recovery.
More
than three years of falling wholesale prices in China suddenly reversed in March
as the rising cost of oil and other commodities began to affect a range of industries.
Producer
prices — mainly those charged by factories for wholesale purchases — climbed last
month compared to a year earlier for the first time since September 2022, according
to government data released on Friday.
The
war in the Middle East, which started on Feb. 28 with strikes by the United States
and Israel on Iran, leading Iran to retaliate by effectively shutting the Strait
of Hormuz, has prompted higher prices and shortages of energy and other commodities.
For example, Persian Gulf exports previously accounted for nearly a tenth of the
world’s aluminum.
While
governments in many countries, including in the United States and Europe, brace
for the trauma of higher prices that eat into consumer spending, China had the opposite
problem before the war.
Falling
wholesale prices have plagued the Chinese economy. Thousands of manufacturers have
had to sell their goods for less and less. Consumer prices have also stagnated in
China and occasionally fallen, helping to depress wages.
The
Bureau of Labor Statistics is scheduled to release consumer price data for the United
States on Friday in Washington. Those numbers will be scrutinized for the extent
to which the Middle East war may be affecting inflation and affordability in the
United States. Rising prices in China can seep through to prices in the United States,
because much of America’s supply of manufactured goods comes directly from China
or indirectly, through countries like Vietnam and Mexico.
A
broad fall in the price level across an economy, a phenomenon known as
deflation, makes it hard for companies to pay their debts and their workers. Chinese
policymakers have been so wary of deflation that they have banned the country’s
economists from publicly discussing its dangers.
Producer
prices rose 0.5 percent in March from a year earlier, led by increases in prices
not just for fuel but also for aluminum. Producer prices
fell 0.9 percent in February.
Because
the increase in producer prices mainly involved higher prices for imported raw materials,
however, the benefit for Chinese manufacturers’ profitability may be limited.
Inflation
in consumer prices slowed slightly last month with the fading of a brief surge in
spending during Lunar New Year celebrations in February.
Consumer
prices were up 1 percent in March from a year earlier, compared with 1.3 percent
in February. Weak spending in China, mainly the result of a prolonged housing market
downturn, has made it hard for companies to raise retail prices.
China
also has a surfeit of pigs that has driven down prices for pork, a staple of the
Chinese diet and an important component of the country’s Consumer Price Index. Wholesale
pork prices hit an eight-year low in March.