China's producer prices grow at fastest rate since 2008

According to China's National Bureau of Statistics, the producer price index rose by 9.0% in May, from 6.8% in April. The increase, the fastest annual pace since September 2008, was ahead of forecasts, with most analyst looking for 8.5%.

Month-on-month, prices rose 1.6%, up from 0.9% in April.

The NBS attributed the rise in PPI to significant increases in the prices of crude oil, iron ore and non-ferrous metals.

The strong factory gate prices have yet to feed through to consumer prices, however, with the consumer price index coming in below consensus, at 1.3%, from 0.9% in April. Analysts had been expecting a rise of 1.6%.

Freya Beamish, chief Asia economist at Pantheon Macroeconomics, said: "Consensus [for CPI] looked high, given the drop in pork prices as farmers try to sell their animals amid a fresh swine flu outbreak. The effect was even stronger than we were expecting, so food prices rose by only 0.3% year-on-year in May, despite favourable base effects for inflation, after the 0.7% fall in April."

Addressing the rise in PPI, she added: "The increase was driven by energy and metals.

"With the Commodity Research Bureau RIND index continuing to rise, and supply-side bottlenecks remaining unresolved, month-on-month gains in the PPI probably will continue to outpace those last year, with the year-on-year rate of inflation edging higher still and remaining lofty through the second half."

Neil Wilson, chief market analyst at Markets.com, said: "China’s PPI, a key leading indicator of global inflation, rose as its fastest pace in 13 years as base effects from last year’s pandemic and a boom in commodity prices fed into higher prices paid by businesses.

"It’s not a major surprise; we know inflation is here right now. The question remains about the degree to which this is a transitory force or a lasting shift."

Iris Pang, ING’s chief economist for Greater China, said: "As the gap between CPI and PPI growth rate widens, profits of producers are going to fall as they cannot pass rising costs on to consumers.

"This is especially true at the moment when there are small lockdowns in the Guangdong province…which means demand for goods in the domestic market is affected. Producers can look to the global market for a price increase. But overseas markets have only recently started to recover, and it is uncertain if producers can pass the extra costs onto export markets."