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China’s core PPI data shows higher inflation may be due to lower base effects

calendar 09/06/2021 - 16:52 UTC

On Wednesday, Chinese data shows China's producer price index (PPI) jumped by 9.0% in May, accelerating from a 6.8% surge sequentially (April), above market expectations of 8.5% (y/y). This was the fifth straight month of increase in factory gate prices and the steepest pace since September 2008, amid a faster recovery in domestic production and rising commodity prices (raw material costs. Every month (m/m), PPI also surged 1.6% in May.

After China’s surging PPI data, China vows to control food inflation (corn, wheat, pork, etc) in ‘control to keep prices of foods/commodities linked to livelihood stable’. China is also considering imposing price controls on the surging thermal coal market to keep energy inflation under check. The NDRC plans to expand state stockpiles of pork, and toughen oversight of other markets for staple foods. The NDRC said in a statement:

It was recently approved by the National Development and Reform Commission, the Ministry of Finance, the Ministry of Agriculture and Rural Affairs, the Ministry of Commerce, the State Administration of Market Supervision, Food and Reserves Bureau and other 6 departments jointly issued and implemented. To do a good job of implementation, on June 8, the National Development and Reform Commission held a national video conference...

The meeting pointed out that the Party Central Committee and the State Council attach great importance to the price control of important livelihood commodities. In recent years, the price control mechanism for important livelihood commodities has been continuously improved, and remarkable results have been achieved in the work of ensuring supply and stabilizing prices.

However, the production, supply, storage, and sales of important livelihood commodities have a long chain, many links, and a wide range of coverage. The characteristics of "small production and large market" are prominent. In the face of natural disasters, market risks, and emergencies, prices are prone to rise and fall. It is necessary to speed up the improvement of the price control mechanism of important livelihood commodities, continuously improve the ability to maintain supply and stabilize prices, effectively resolve the impact of livelihood commodity supply and price fluctuations on people’s lives, better meet the people’s growing needs for a better life, and effectively enhance the people’s sense of gain, sense of happiness and security.

Production, distribution, consumption, and other links, give full play to the role of government, market, society, etc., use economic, legal, administrative and other means to improve the ability and level of price control, and effectively guarantee the effective supply of important livelihood commodities and the overall stability of prices.

The meeting also analyzed the current and future price situation, made comprehensive arrangements for this year’s work to ensure the supply and price stabilization of important livelihood commodities, combined with the improvement of the price control mechanism of important livelihood commodities, and focused on key points such as corn, wheat, edible oil, pork, and vegetables. Promote the effective connection of production, supply, storage, and sales. At the same time, we will actively do a good job in the regulation of the bulk commodity market, strengthen market supervision, and make every effort to ensure a sufficient supply of important people’s livelihood commodities and basically stable prices.

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If we observe the Chinese average core PPI before COVID, it was around 108.20 in Jan’20 or even before that, which decreased progressively to 104.80 in May’20 amid Chinese COVID lockdown and subsequent global lockdown; i.e. lower domestic as-well-as external demand. Then the Chinese core PPI gradually recovered to 107.80by Dec’20 amid recovery of domestic (ahead of Chinese new year) and partial external demand. But again plunged to 102.30 in Jan’21 coinciding with 2nd COVID wave in Europe and U.S. (subdued external demand) and post-Chinese new-year holiday demand; the core PPI gradually jumped to 107.40 in May on upbeat external (U.S./Europe-rapid COVID vaccinations) as-well-as domestic demand.

In May’20, the core PPI was at a multi-month (COVID) low at 104.80, and in May’21 it was at 107.40, translating to an annualized core PPI increase of around +2.50%, but it’s increasing around +1% on average sequentially (m/m) since Jan’21, which may plateau in the coming months when the core PPI index again hits around 108.20, the long term pre-COVID average. If it accelerates even above that level, then it may not be termed as transient and because of purely lower base effects.

As China is the world’s factory (exporter), an unusual surge in factory gate prices (PPI) is bound to affect price stability where it supplies products (like in the U.S. or Europe). This coupled with stronger Chinese Yuan (currency), imported inflation in AEs (U.S./Europe) may be higher in the coming days. Now all focus will be on actual core CPI data Thursday in U.S. (for May), which is also expected to be elevated amid lower base effect.

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