(Bloomberg) — China’s factory-gate prices grew at the fastest pace in 26 years in October as raw material costs continued to soar, with signs that producers are passing on higher costs to consumers.   

The producer price index climbed 13.5% from a year earlier, beating economists’ forecasts of a 12.3% gain, data from the National Bureau of Statistics showed Wednesday. Consumer price index rose 1.5% at an annual pace of 1.5%. This is the fastest rate since September 2020, and more than the 1.4% increase projected.

China’s producer prices have risen rapidly over the last few months due to the recent global commodity price rallies and the subsequent output cuts caused by the power crisis. As weather-related supply issues push up food prices, and the manufacturers pass higher costs on to consumers, consumer inflation is starting to pick up. 

The data “implies broad-based inflation pressure on both the production side and the consumer side,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd. “Inflationary pressure and the more hawkish stance of monetary policy in other major economies will likely limit China’s room to maneuver for monetary easing.”

According to Dong Lijuan, an NBS senior statistician and senior statistician, the rise in PPI was caused by import inflation, tight domestic energy supplies and raw materials shortages. According to her, the CPI increase was caused by factors such as rising costs and tight supplies of certain goods.

This is against the background of an economy that has been experiencing weakening due to electricity shortages, property slumps and viral outbreaks. Inflation may be on the rise. The debate about whether or not the central bank should provide additional policy easing in order to support growth will be rekindled by rising inflation. 

Bloomberg Economics Says…

The acceleration in China’s inflation in October is probably a bit of a side show for the central bank — we don’t expect the People’s Bank of China to take its eye off the need to cushion a slowdown in the economy. We still expect it cut banks’ required reserve ratio by another 50 basis points in the next month or so.

David Qu, China economist

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CPI is a key driver for pork prices. But, the decline was smaller than it had been in previous months. Food prices are also decreasing. After supply disruptions caused by shortages, vegetable prices rose significantly in October. This prompted the government to clamp down on hoarders. The statistics bureau reports that vegetable prices rose by 15.9% over a previous year, adding 0.33 percentage points towards the rise in CPI. 

Core inflation, which does not include food or energy, increased to 1.3% 

Signs are that some upstream companies have begun to transfer rising costs onto downstream businesses. Due to rising raw materials costs, several food companies including Jiajia Foods, Anjoy Foods or Haixin Foods have already raised prices by up to 15%. 

(Updates with further details, comments by economists.

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