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China’s factory inflation surges again on commodity prices

HONG KONG (Bloomberg): China’s factory inflation surged again in July, following a short-lived retreat in the previous month, as commodity prices remained high despite the government’s steps to rein in costs.

The producer price index grew 9% in July from a year earlier, the National Bureau of Statistics said Monday (Aug 9), quickening from 8.8% in the previous month and beating the median forecast of an 8.8% gain. Consumer prices rose 1% in July, easing for a second month but remaining above the median estimate of 0.8%.

China’s economic growth is losing momentum as a new round of coronavirus outbreaks across the country restricts spending and travel. It could also temporarily boost inflation pressure, if lockdowns are implemented on a larger scale and supply and logistics are disrupted. The severity though would depend on how fast Beijing can bring the pandemic under control.

“PPI will probably be around 6% by the year-end. This will to some extent limit the room for monetary easing,” said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore.

“The possibility of a rate cut is extremely small.”

Chinese government bonds extended losses after the data, with the yield on the 10-year security rising 4 basis points, the most since January, to 2.85%.

Beijing has been trying to quell the surge commodity prices by releasing inventory from the nation’s strategic reserves, cracking down on hoarding and speculation, and ordering state-owned enterprises to limit their exposure to overseas commodities markets.

The statistics bureau cited the sharp rise in prices of crude oil and coal in the month, which resulted in higher prices of industrial products.

Core CPI, which excludes volatile food and energy prices, rose 1.3% in July from a year ago, suggesting domestic demand is getting stronger. Pork prices, a key item in the CPI basket, dropped 43.5%, driving food prices down by 3.7%. Non-food prices climbed 2.1% from a year ago, partly due to the pass-through from elevated upstream prices.

“This puts the policy makers in a dilemma: inflation is rising and growth is slowing,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management, adding that the pandemic might put further stress on the supply chain.

With growth risks mounting, speculation is rising that the central bank will ease policy again after a surprise move in July to cut the reserve requirement ratio for banks.

The Communist Party’s top leadership pledged more targeted support for the economy at a Politburo meeting late last month, reiterating a commitment to stabilise commodity prices and to provide more effective fiscal spending in the second half.

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