China's Producer Price Index Surges 6.8% in April, Reflecting Global Commodities Rally

Strategic Insights -

Chinese factories are a telling sign of inflation as the global economy recovers from the coronavirus pandemic, with the country's producer price index (PPI) rising 6.8 percent year on year in April, its fastest pace of growth in more than three years. The surge was driven by a global commodity price rally, supported by China's voracious demand and hopes that other big economies will bounce back. While the overall inflation picture remains mixed, with consumer price rises still below 1 percent, the data reflects pockets of price rises emerging across China's rapid recovery.

Key Takeaways:

  • The PPI growth rate of 6.8 percent in April was the fastest pace in over three years, driven by a global commodity price rally.
  • Global commodity prices, including iron ore and oil, have rebounded sharply from last year's collapse, with 70 percent of the April PPI increase attributed to commodities.
  • China's construction boom and strong industrial growth have led to record output of steel, contributing to the commodity price surge.
  • The transmission of PPI to consumer price index (CPI) inflation is expected to be limited, allowing policymakers to remain accommodative.
  • Economists forecast a rise in CPI inflation in China this year, with Ting Lu at Nomura predicting a 2.8 percent end-of-year CPI inflation rate.
  • The People's Bank of China is unlikely to tighten monetary policy in response to PPI, but higher raw material prices pose a risk to Chinese demand and the wider recovery.

Statistics:

  • China's PPI rose 6.8 percent year on year in April, its fastest pace of growth in over three years.
  • Global commodity prices, including iron ore and oil, have rebounded sharply from last year's collapse.
  • Iron ore hit its highest level on record as of this week.
  • Oil prices have recovered sharply from last year.
  • 70 percent of the April PPI increase was driven by commodities.
  • China's construction boom and strong industrial growth have led to record output of steel.
  • Chinese exports rose 32.3 percent year on year in April.
  • Durable consumer goods grew 0.4 percent month on month in April, the fastest pace since at least 2011.

Sources:

  • Bloomberg, "China Producer Price Index Surges Amid Commodity Rally"
  • Morgan Stanley, Quoted in Bloomberg
  • HSBC, Analysts quoted in Bloomberg
  • Nomura, Ting Lu quoted in Bloomberg
  • ING, Iris Pang quoted in Bloomberg
  • CEIC, Data company
  • Morgan Stanley, Data on Chinese exports
  • China's National Bureau of Statistics