China’s factory inflation defies global surge, leaving room for stimulus

REUTERS-BEIJING- China’s factory-gate inflation eased to a one-year low in April as state-driven production efforts supported supply and COVID-19 lockdowns in key industries cooled demand, giving policymakers headroom for more stimulus to shore up a flagging economy.

Consumer prices rose at their fastest pace in five months as widespread COVID-19 lockdowns across major cities hit supplies of household items, but remained relatively benign despite surging global commodity costs, which have forced central banks elsewhere to rapidly raise interest rates.

The producer price index (PPI) rose 8.0% year-on-year, the National Bureau of Statistics (NBS) said in a statement on Wednesday, slower than the 8.3% rise in March but faster than the 7.7% growth tipped by a Reuters poll.

“Producer price inflation will continue to drop back over the coming quarters,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Although there is still a great deal of uncertainty caused by the war in Ukraine, we generally think global commodity prices will end the year lower.”

The slower rise in the PPI was driven by government measures to stabilise commodity prices and increase supply, NBS official Dong Lijuan said in a separate statement.

China’s state planner on Tuesday called for stabilising energy prices and an acceleration in oil and gas exploration and development.

Beijing has targeted daily coal production at 12.6 million tonnes this year and prioritised energy security in the wake of geopolitical uncertainties caused by the Ukraine conflict.

Price rises slowed in 22 of 40 industrial industry categories surveyed by the NBS, with prices in coal mining and washing up 53.4% year-on-year, down 0.5 percentage points from March.

China’s economy slowed sharply at the beginning of the second quarter, as authorities in dozens of cities imposed restrictions to stamp out COVID-19 outbreaks, with Shanghai currently in its sixth week of lockdown.

 The COVID-19 outbreaks led to a rise in the consumer price index (CPI), according to Dong.

The CPI gained 2.1% from a year earlier, the fastest pace in five months, partly due to food prices, speeding up from March’s 1.5% growth and beating expectations for a 1.8% rise.

Food prices grew 1.9% from a year earlier, compared with a 1.5% drop in March.

Annual CPI growth remains well below the government’s annual target of 3% this year, a sign consumer price pressures remain relatively contained.

“As such, inflation is unlikely to be a constraint on policy action by the PBOC (People’s Bank of China),” said Julian Evans-Pritchard.

China’s capital of Beijing, which reported 24 new locally transmitted coronavirus cases for Tuesday, has banned residents from eating inside restaurants and suspended all gyms and offline tutoring classes.

The tighter curbs have taken a toll on China’s economy with export growth slowing to its weakest in almost two years and factory activity contracting at a steeper pace in April.

 The central bank said on Monday it would step up support for the real economy, while closely watching domestic inflation and monetary policy adjustments in developed economies.

The PBOC cut the amount of cash that banks must hold as reserves in April with more modest easing steps expected.