China’s rising factory prices put pressure on Beijing to do something about them

China’s producer-price index jumped 9.0% from a year ago in May, accelerating from April’s 6.8% increase, the National Bureau of Statistics said Wednesday. The result topped the 8.6% increase expected by economists polled by The Wall Street Journal, and marked the fastest year-over-year rise since September 2008, when producer prices rose 9.1%.

The statistics bureau said that soaring crude-oil, iron-ore and metals prices boosted factory-gate prices last month, and drove China’s imports to the fastest increase in over a decade.

“Industrial inflation pressure will likely remain and pose additional risks to economic growth," Citigroup economists said in a note, adding that there is no quick fix to this round of commodity-led inflation.

In recent weeks, several research houses, including ANZ and Standard Chartered, have raised their forecasts for China’s PPI after signs of accelerated price gains.

Prices of major commodities have been on an upward trend since last year, when global demand started to pick up after the pandemic shock. Supplies—other than those provided by China, where business resumed early—haven’t fully recovered. Recent Covid-19 resurgences in developing economies including India made things worse again. Meanwhile, China’s production capacity, which has surpassed pre-coronavirus levels, is becoming more strained.

“Today’s data showed that the pressure of soaring raw-material prices is pretty heavy for industrial firms and such pressure is now passed through to downstream firms in an accelerated way," said Li Wei, an economist at Standard Chartered.

Factories in what is known as the upstream supply chain produce goods and parts that downstream companies turn into finished products and consumer goods.

The faster-than-expected price gains have eaten into the profitability of many small businesses downstream in China’s industrial chain that haven’t yet fully recovered from the pandemic-induced weak consumer demand. However, it benefits upstream factories, whose profits more than doubled from a year earlier according to Goldman Sachs, with their products in high demand.

To rein in prices, Chinese authorities have been zeroing in on the speculative behavior in the futures market that helped fuel the rally in steel and iron-ore prices. Since May, China’s cabinet has cautioned repeatedly against the economic impact of rapidly rising commodities prices and called for clampdowns on hoarding and speculation. The cabinet moved last month to limit domestic producers’ sales abroad of some raw materials such as steel to tame prices domestically.

With prices skyrocketing, the northern city of Tangshan, the nation’s largest steel-production hub, decided to pare back the limits imposed on the city’s steelmakers earlier this year. Under the previous limits, seven major steelmakers were ordered to cut production by 50% by midyear for Chinese leaders’ decarbonization plan.

Beijing dismissed earlier this month the idea of letting its currency, the yuan, appreciate faster to offset the rising cost of commodities imports, instead taking measures to slow the rapid pace of the yuan’s appreciation.

Emily Cheng, co-founder of Shenzhen Vanzone Technology Co., a trading company that connects customers in the U.S. and Europe with manufacturers of mobile-phone accessories in China, said that rising component costs was one of the most important factors cutting into Chinese manufacturers’ profits.

“Everything we import has seen the prices go up," Ms. Cheng said. “The prices of raw materials, especially the chips, and even plastics, have also gone up a lot." She added, “Some of our manufacturers have almost run out of profits."

Resilient global demand as people get vaccinated against Covid-19 and a slower recovery in global supply will soon prompt Chinese producers to pass their higher costs on to customers, said Mr. Li, of Standard Chartered.

China’s consumer inflation has so far remained tame, according to official data released Wednesday. The consumer-price index rose 1.3% from a year ago in May, higher than the 0.9% growth in April but lower than the 1.5% increase expected by the surveyed economists.

Falling pork prices fueled the lower-than-expected consumer inflation. The staple meat had driven rising inflation since 2019 because of swine fever. Still, higher commodity prices have been reflected in nonfood prices. The cost of airplane tickets, gas and fuel rose by double digits in May, according to the official data.

The gap between China’s consumer and producer inflation could complicate policy-making, with the muted consumer inflation possibly constraining the central bank’s ability to tighten monetary policy.

Citigroup economists suggest that the current producer inflation would be better tackled by China’s state planner, which controls prices and monitors market supplies, and wouldn’t trigger monetary tightening.

This story has been published from a wire agency feed without modifications to the text