China Factory-Gate Price Gains Ease as Commodities Drop

(Beijing) — China’s producer prices rose at their slowest pace in four months in April while consumer inflation accelerated to the highest since January, official data showed Wednesday.

The producer price index (PPI), a gauge of factory-gate prices, rose 6.4% last month from a year ago, the weakest increase since December and down from a 7.6% gain in March, according to the National Bureau of Statistics (NBS).

The April figure, which trailed the median estimate of 6.6% in a Caixin poll of economists, marked the second straight slowdown from an eight-and-a-half-year high reached in February and adds to evidence that the reflation surge of the past few months has peaked.

The consumer price index (CPI), which measures prices of a basket of consumer goods and services, rose 1.2% in April year-on-year, the NBS said, up from a 0.9% pace in March, on the back of a smaller decline in food prices and a faster increase in non-food prices.

“We continue to view inflationary pressures as contained in 2017, with CPI inflation rising gradually (partly due to a pass-through from high property prices) and PPI inflation moderating against a background of a shallow economic slowdown,” Nomura International economists Zhao Yang and Wendy Chen said in a research report.

Larry Hu, an economist with Macquarie Capital Ltd. in Hong Kong, said the inflation readings are sending the same message as PMI and trade data published earlier this month that the “Chinese economy has passed its peak” in the first quarter.

Falling Commodity Prices

Month-on-month, PPI posted its first decline since June 2016, falling by 0.4% in April from March, according to the NBS. Prices of products such as steel and chemical raw materials dropped while the fall in the cost of resources including oil and natural gas deepened.

“The deflationary pressure was possibly due to high inventory — high-frequency data of iron ore inventory at Chinese ports hit a record high in April — and weakening domestic demand as implied by April import data,” Nomura International’s Zhao and Chen said.

China’s imports rose at the slowest pace in four months in April, and the country’s purchases of major commodities such as iron ore, copper, and crude oil fell from March in value and volume terms, data released on Monday by the General Administration of Customs showed.

The increases in the PPI over the past few months have been driven mainly by a recovery in prices of commodities including crude oil, coal and iron ore, along with heavy-industry goods such as steel and chemicals.

NBS statistician Sheng Guoqing said in a statement that 5.1 percentage points of the 6.4% increase in the PPI was accounted for by the base effect of low prices last year, with only 1.3 percentage points coming from new price increases.

That effect will start to taper off as commodity and raw material prices are now stabilizing or even falling, which is likely to lead to continued moderation in the PPI in the coming months.

Hu from Macquarie Capital said that with commodity prices now declining and inventory restocking over, PPI inflation could fall to around zero toward the end of the year.

Prices in the petroleum and natural gas extraction sector climbed 43% last month on a yearly basis, down from a surge of 68.5% in March. Month-on-month, they fell 4.2% in April, compared with a dip of 0.1% the previous month, NBS data showed.

The year-on-year increase in the cost of mined ferrous metals, which mainly consists of iron ore, eased to 21.8% last month from 29% in March, while prices fell 2.6% on a month-on-month basis following a gain of 4.8% the previous month.

Domestic commodity prices have also been affected by a crackdown by regulators on leverage and financial speculation.

As an example, the price of iron ore futures traded in the Dalian Commodity Exchange rose 22.5% year-on-year in April compared with an 83.6% surge in March.

Demand for cement, a key raw material for the construction and real estate sectors and which has a short inventory life, has held up well, with prices increasing over the past few weeks, even as steel prices slumped, said Hu. That suggests demand in the economy is still “OK” and that policy makers still have a window of opportunity to continue to tighten financial regulation, he said.

Non-Food Prices

The jump in producer-price inflation has yet to feed through into consumer inflation, which is still influenced mainly by changes in food prices. Food prices fell by 3.5% year-on-year in April, slowing from a decline of 4.4% in March. On a month-on-month basis, the decline in food, liquor and tobacco prices narrowed to just 0.3% from a 1.3% drop in March.

But non-food inflation continued to edge up, and was at 2.4% in April compared with 2.3% in March, driven by rising prices in health care, travel, transport and education services. Non-food prices contributed 1.9 percentage points to the headline consumer inflation reading last month, the NBS said.

Non-food inflation has been running at an annual pace of over 2% so far this year, more than double the pace in the first four months of 2016 and the longest stretch of gains higher than 2% since the second half of 2011.

Consumer inflation is still well below the ceiling of 3% set by Premier Li Keqiang in March and economists at JPMorgan Chase estimate the rate will be around 2% for the full year.

Most economists don’t expect the central bank to raise benchmark interest rates this year given the mild inflationary environment for consumer prices and expectations that the surge in producer prices will continue to moderate.

But the central bank and other regulators will continue to tighten policy in the financial sector, and possibly increase money-market interest rates, in order to force institutions to cut their leverage to rein in financial risks and cool the property bubble.

Contact reporter Fran Wang (fangwang@caixin.com)