China’s Industrial Inflation above Expectations
By Suyang Zhou - Research Analyst
China's industrial inflation rose 6.9% y-o-y in September, far exceeding market consensus. Demand recovery, coupled with tighter control on industrial supply to curb environmental pollution led to faster industrial inflation. While consumer inflation was up 1.6% y-o-y, it was 0.2% slower than the previous reading but was still on par with financial street forecasts. Weaker food prices were believed to be a major laggard of consumer inflation.
Before we look into the industrial inflation, let's first look at its leading indicators. In a recent PMI note, we found that output and input prices both edged up further in September, which pointed to a further recovery in producer price index.
On a month-over-month (m-o-m) basis, PPI rose 1.0%, 0.1% percentage points faster than August’s m-o-m headline. Producer costs in the upstream, including mining (+2.0% m-o-m) and raw material (+1.9% m-o-m), were major drivers against the backdrop of supply-side reform, which mostly alleviates industrial overcapacity issues.
Sector-wise, Ferrous Metal Smelting & Pressing (+3.4% m-o-m) increased the most, followed by Non-ferrous Metal Smelting & Pressing (+3.2% m-o-m), Petroleum, Coking & Nuclear Fuel (+2.9% m-o-m), Petroleum & Natural Gas (+2.6% m-o-m), and Ferrous Metal Mining (+2.2% m-o-m).
The picture is more mixed when we turn to the case of year-over-year (y-o-y) growth. The producer prices in the upstream sectors continued surging. Coal Mining (+28.6% y-o-y), Petroleum & Natural Gas Mining (+14.2% y-o-y), Non Ferrous Metal Mining (+14.1% y-o-y), and Ferrous Metal Mining (+13.7% y-o-y) saw double-digit growth in prices.
However, prices in the mid- and down-stream sectors, such as Computer, Telecom & Other Electronic Equipment (-0.7% y-o-y), Automobile (0% y-o-y), Tobacco (0% y-o-y) and General Equipment (+1.0% y-o-y), were trailing low regardless of high cost growth in the upstream sectors. In other words, downstream producers can hardly translate soaring input costs into selling prices, this in turn encroached their margins.
On the other hand, China's consumer inflation slowed down and rose 1.6% y-o-y. The drivers again, came from non-food sectors (+2.4% y-o-y) including healthcare (+7.6% y-o-y), tourism (+3.8% y-o-y), residence (+2.8% y-o-y) and education (+2.3% y-o-y). In total, non-food CPI contributed 79.6% to y-o-y CPI growth.
By contrast, food price was diving deeper with deflation (-1.4% y-o-y), mostly decreased by pork (-12.4% y-o-y), meat and poultry (-7.5% y-o-y) and fresh fruit (-3.0% y-o-y).
Core CPI, with volatile food and energy prices excluded, was steadily moving higher to 2.3% y-o-y in September. Looking ahead, core CPI will continue such reflation pace in light of the rising prices of non-food basket, particularly in service prices.