MNI: China CPI Seen Briefly Topping 3% As Commodities Soar

China’s consumer price inflation may top 3% for some months this year, as the war in Ukraine drives global energy and raw material costs still higher, but weak domestic demand should still allow policymakers room for monetary and fiscal stimulus, policy advisors told MNI.

Increased fuel prices will add to transportation fees and costs of everything from food to consumer goods, said Wang Jun, academic committee member at the China Center for International Economic Exchanges. But the People’s Bank of China should still have room for at least two cuts to banks’ reserve requirement ratio for a total 50 basis points, or to cut its medium-term lending facility rate, said Wang Jun, also chief economist at Zhongyuan Bank.

While it could surge in some months, CPI should average around 2% for year as a whole, within the government’s 3% ceiling, said Wang Jun, pointing to weakening demand and a high comparison base effect.

For the moment, consumer prices are still subdued, rising only 0.9% y/y in February due to falling pork prices. Producer price inflation eased for the fourth straight month to 8.8%.

But CPI could rise above 3% in some months, and PPI may reverse its current slowdown in the first half of the year, said Wang Yongzhong, head of international commodity research at the Institute of World Economics and Politics, Chinese Academy of Social Sciences.

With Brent and U.S. crude futures hitting price peaks over USD100 a barrel not seen since 2008, China could diversify its import sources or release national reserves, though the effect on taming prices would be limited, said both Wang Jun and Wang Yongzhong. China imported 73% of its oil and 43% of its natural gas as of 2020, with Russia accounting for about 15% and 9% of the respective totals.

While a one-time release of crude reserves might reassure markets, it would not be enough to meet daily domestic demand of about 14 million barrels, Wang Yongzhong said. China has also been expanding domestic output of coal.

There is little room for China to take advantage of cheaper Russian oil, as western buyers shun that country’s output, Wang Yongzhong said, adding that energy imports from Russia should remain basically stable due to logistical constraints, though some private refiners may buy more in limited amounts. China’s oil imports are highly diversified, with supplies coming from more than 30 countries and import from a single country is controlled at around 15%.

CAR PRICES

Price hikes in other raw materials including precious metals and inert gases will also be hard to be offset.

Market concerns about a shortage of microchips linger as the conflict between Russia, the world's leading exporter of palladium, and Ukraine, which produces about 70% of neon, threaten supplies of raw materials for semiconductors.

“Chip makers normally have raw material inventory for production for at least six months,” said Liu Enqiao, researcher of ANBOUND, adding that chip giants have been diversifying their importing sources to avoid supply interruption.

But disruption to chip production could last two to three years, causing spillover problems for global industries such as auto makers, Liu said.

About 20 new electric vehicle makers have reportedly raised prices since March, as the cost of materials for batteries including lithium and nickel more than doubled.