Nov 16, 2021 09:20 PM

China Plays Down Stagflation Concerns as Commodity Price Gains Seen Easing

Fu Linghui, spokesperson of the National Bureau of Statistics (NBS) and director general of the Department of Comprehensive Statistics of the NBS. Photo:
Fu Linghui, spokesperson of the National Bureau of Statistics (NBS) and director general of the Department of Comprehensive Statistics of the NBS. Photo:

China’s statistics bureau has played down concerns that the world’s second-largest economy risks falling into stagflation, describing this year’s surge in factory-gate prices as a temporary phenomenon caused by short-term disruptions that are gradually being addressed.

Rising global commodity prices and domestic supply shortages of some energy and raw materials are the main reasons for the jump in producer-price inflation that’s affected China this year, Fu Linghui, a spokesman for the National Bureau of Statistics, said at a briefing on Monday after the release of October monthly economic activity data. The increase in commodity prices has led to higher costs for some businesses, he said.

“The market’s efforts to maintain supply and stabilize prices are increasing and the tight supply of some energy products is gradually improving. This is all conducive to stable economic growth,” he said in response to a question about how the government can tackle the risks posed by stagflation, a term that refers to a situation where an economy simultaneously experiences stagnant economic growth and accelerating inflation.

Stagflation is considered bad for the economy because policies the central bank would normally take to rein in inflation, such as raising borrowing costs, tend to increase unemployment and reduce domestic demand, which slows economic growth. But if expansion is already weak, the authorities become reluctant to increase interest rates for fear of exacerbating the economic slowdown and thus stagflation limits their ability to implement policies to bring down prices.

In China, the producer price index (PPI), which measures changes in prices of goods bought and sold among manufacturers and mining companies, has surged over the past few months as a result of surging prices of commodities including crude oil, coal and iron ore. The index jumped 13.5% from a year earlier in October, the fastest pace in 26 years, although so far the increases in industrial prices aren’t feeding through into consumer inflation in a significant way.

The consumer price index (CPI) rose by 1.5% year-on-year last month, well below the government’s target ceiling of around 3% for this year, but it was the biggest jump since September 2020. At the same time, economic growth is slowing, with GDP increasing by 4.9% year-on-year in the third quarter, down from a 7.9% pace the previous quarter. Some analysts estimate the pace could slow to 3% or lower in the fourth quarter.

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Although the impact of rising global energy prices is still evident in the PPI, the government has stepped up efforts to increase production and supplies of coal to ease power shortages and has released some key commodities from national reserves. Fu said the government is also providing financial and fiscal support for enterprises, which will help ease price pressures and reduce the transmission of inflation from the PPI to the CPI.

Some analysts have expressed concern that stagflation could harm economic activity. The profits of midstream and downstream enterprises are under downward pressure because weak consumer demand makes it difficult for them to pass on rising upstream costs, Chen Jiangyue, a fixed-income analyst at brokerage Century Securities Co. Ltd., wrote in a note last week. The pressure on profits has further depressed expectations for revenue growth and employment, Chen wrote.

Although supply-side pressures have eased, weakening demand is a significantly more important reason for the slowdown in industry, Louis Kuijs, head of Asia economics at Oxford Economics Ltd., wrote in a Monday note. A new wave of Covid outbreaks is dampening household consumption, he wrote.

Although headline CPI growth on a year-on-year basis suggests the surge in the PPI isn’t feeding through so far, many economists expect consumer inflation to pick up over the next few months as manufacturers are forced to put up prices.

“Driven by the rise of food prices from panic buying, bad weather and some pass-through from higher energy prices, we expect CPI inflation to rise to 2.5% year-on-year in November but believe year-on-year PPI inflation may have already peaked in October,” economists at Nomura International (Hong Kong) Ltd. wrote in a note last week.

Analysts at Macquarie Capital Ltd. expect CPI inflation to edge up further in 2022 although they don’t expect it to top 3%, while UBS Investment Bank analysts forecast an average rate of 2% over next year and Australia and New Zealand Banking Group Ltd. sees an average of 2.4%.

A CPI at that level is unlikely to prod the central bank into raising interest rates to contain inflation, especially as most economists expect the PPI to fall back in 2022 as commodity price gains peter out. UBS, for example, sees PPI growth averaging 2% to 2.5% next year, although Morgan Stanley’s base case scenario is for the index to rise by around 8% next year.

The government will be concerned about supporting economic growth and is likely to ease fiscal and monetary policy, Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd., said in a Nov. 10 note. He also expects some easing of policies in the property and energy sectors to support the economy.

“Given the economy is slowing and the PPI inflation might have already peaked, policymakers are set to step up policy supports in the months ahead,” Macquarie analysts wrote in a report Monday.

The upcoming Politburo meeting and Central Economic Work Conference, both scheduled for December, are the key gatherings to watch for policy direction, the analysts said. “They could shift the focus back to economic growth as they might want to defend 5% GDP growth for 2022.”

Contact reporter Guo Yingzhe ( and editor Nerys Avery (

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