Higher world grain prices will make Chinese pork dearer and feed consumer price inflation, advisors say.
More expensive commodities and a weaker yuan could push Chinese consumer price inflation over 3% by next year, but for the moment the negative impact on manufacturers’ profits will only add to reasons for the People’s Bank of China to maintain accommodative monetary policy even if it crimps room for additional easing, advisors and analysts told MNI.
Food prices, including for key index component pork, are set to rise for the rest of this year due to a combination of supply snags caused by restrictions imposed in response to a Covid outbreak and higher global grain prices. More expensive energy will also push up prices for industrial products and eventually feed into CPI, said Zhu Qibing, chief macro analyst at BOC International.
These factors were already visible in March, Zhu said, when both factory-gate and consumer prices rose faster than expected. March CPI gained 1.5% year-on-year, the most in three months, while month-on-month PPI of 1.1% was the highest since last October, according to the National Bureau of Statistics.
Steep rises for non-food CPI items and consumer-related PPI categories indicate the transmission from producer to consumer price inflation has started to accelerate, Zhu said, adding that such pressures may intensify in 2023.
Smaller companies have faced high materials prices for a year, with the Ukraine war only increasing the pressure, said Cui Yu, researcher at the Beijing Tengjing Institute of Big Data Technology, a think tank led by PBOC monetary policy committee member Liu Shijin and several high-ranking policy advisors.
Cui argues that the PBOC needs to retain an accommodative stance, making targeted moves to ease financial conditions for sectors such as small business, if China is to reach its 2022 growth target of about 5.5%, adding that inflation driven by overseas price rises does not tend to drive asset price bubbles or overheating.
While consumer price inflation should rise only moderately to around 2.3% this year, from 0.9% in 2021, pressures from imported prices should be closely watched, she said, noting that nonferrous metal inventories are low and gold prices firm, both leading indicators pointing to PPI remaining at elevated levels.
PPI could exceed 5% for the year if global energy prices remain high into the third quarter, and while it will edge down in coming months, this will mainly be due to base effect, Cui said.
Upstream manufacturers’ profits will be squeezed as the yuan softens over the rest of the year, weighing on an economy already losing momentum, a policy advisor who asked for anonymity told MNI. While a weaker currency should benefit exporters, strict lockdowns in response to the Covid outbreak have caused supply chain snags, making Chinese goods less attractive to foreign buyers, particularly as other countries’ production lines are recovering from the pandemic, the advisor said.
REDUCED EASING ROOM
But despite its impact on activity, a rise in inflation over 3% next year, propelled by more expensive pork thanks to higher grain prices and other forms of imported price rises, could reduce room for the PBOC to ease more, the advisor said.
The PBOC is already aware of the risk of allowing a rise in inflation, said Zhu, pointing to last week’s smaller-than-expected 25-basis-point cut in banks’ reserve requirements.
The path of inflation has been made harder to predict by the impact of the Ukraine war and the Covid outbreak, according to both Zhu and Cui. It will also be some time before the effect of the latest lockdowns on demand and output is clear, they said.
China’s economy should peak in August, when the total social finance measure of credit expands by 11.2% and the M2 money supply rises by 9.7%, Cui said.