China's Factory Inflation Cools Again as Commodity Prices Ease

China's Producer Price Gains Moderate

China’s producer price gains moderated following further easing in commodity prices, signaling weaker overall inflation pressure in the pipeline.

Key Points

  • Producer price index rose 5.5 percent in May from a year earlier, compared with an estimated 5.6 percent in a Bloomberg survey and 6.4 percent increase in April
  • Consumer price index climbed 1.5 percent, versus a prior gain of 1.2 percent, the statistics bureau said Friday

Big Picture

Resurgent factory inflation since last year has moderated, in step with the faltering global commodity rally. Regulatory efforts to contain financial leverage may also weigh on property and infrastructure investment in the second half of the year, denting a crucial pillar for raw material demand. Global commodities sank to one-year low this week, which may further erode raw material prices for Chinese producers.

Earlier this year, vendors at the bi-annual Canton Fair in Guangzhou said in interviews that pricing pressures for key supplies and labor had eased. Makers of everything from camping equipment to wheelchairs said they expect that the worst is over for rising producer prices, which peaked in February with a 7.8 percent rise after snapping four years of deflation last year.

Economist Takeaways

"China’s factory reflation story is coming to an end," Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report. "As that happens, hopes for high industrial profits will fade and fears about a high debt burden will loom larger."

"Inflationary pressure is fairly muted for now," said Tommy Xie, Singapore-based economist at Oversea-Chinese Banking Corp. who accurately forecast both May CPI and PPI. He expects PPI to "hover around the current level for a while" before easing further this year.

"Inflation in general is likely to be subdued this year, and is not an important factor driving macro policies," said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. "Recent monetary tightening is mainly geared to slow the pace of leverage."

Given the strong relation between raw materials, PPI, and import prices, "the dip in raw materials PPI indicates the reflation trade is at least stalling, if not outright dying, for Asia and the world," Vaninder Singh, an Asia economist at NatWest Markets in Singapore, wrote in a report. "There are clear implications for the rest of Asia’s exports and we have seen some of this already materialize in Korean and Taiwanese exports dipping."

The Details

  • Food price declines narrowed to 1.6 percent versus a 3.5 percent drop in April
  • Purchasing prices climbed 8 percent compared with 9 percent the prior month.

— With assistance by Xiaoqing Pi, and Ailing Tan

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