China’s factory prices give global inflation unexpected lift

Bloomberg

Inflationary pressure emanating from the factory to the world is proving more resilient than economists have anticipated. China’s producer-price inflation accelerated to 6.3 percent in August from a year earlier, exceeding all but one of 38 estimates in Bloomberg’s survey of economists. That data released followed 5.5 percent readings in the prior three months and was unexpected for analysts, who have been forecasting more moderation in pricing pressures.
The surprise strength gives support for global inflation spanning from metals to fuel and shows the effects of resilient domestic demand and reduced supplies of some commodities. China’s authorities have been closing mills and smelters to cut excessive industrial capacity and help curb pollution, in turn straining production of metals such as aluminum and steel.
“The key driver has likely come from the supply side,” such as production cuts in response to intensified environmental enforcement in recent months, Robin Xing, chief China economist at Morgan Stanley in Hong Kong, wrote. The bank last week raised its 2017 PPI forecast to 5.5 percent from 4.5 percent, citing stricter anti-pollution measures.
Global metal prices soared last month as China’s demand held up on robust investment and construction amid government reforms that may crimp supplies. That market strength underpins worldwide inflation, and helps ease debt burdens on raw-material producers.
China’s environmental campaign has intensified this year. Inspections that began in Hebei, which surrounds Beijing and is the biggest steel-producing province, have been extended to several more cities and provinces and led to the closures of some businesses and factories.
Aluminum Corp. of China, the nation’s top state-owned smelter of the metal, pledged this month to cut capacity during the winter to curb emissions. Aluminum prices have has surged this year, making it one of the best-performing commodities, on expectations for supply cuts and resilient demand from property and infrastructure. That’s boosting producer inflation.
“While cyclical demand remained resilient, the ‘rationed’ output volume amid stricter environmental inspections may have led to stronger inflationary pressure in August,” Liu Wenqi, an analyst at China International Capital said.
Another underpinning for better-than-expected factory prices comes from infrastructure investment, which is often used to buffer growth amid downward economic pressure. The share of spending used for road, rail and other infrastructure this year has surpassed levels during the global financial crisis.