China’s factory prices jump 5.7%, fastest in over four years, as CPI cools

What happened

Official data released Monday showed China's producer price index (PPI), which tracks what factories and miners charge for their goods, climbed 5.7% year on year in October. That was up from 5% in September and above the 5.3% economists polled by Reuters had expected. Energy led the way: coal mining and washing prices rose 36.6%, and oil and gas extraction prices 35%. The consumer price index (CPI) went the other way, slowing to 0.7% from 0.9% and missing the 0.8% forecast. Core inflation, which leaves out food and energy, eased to 0.8% from 1%. Consumer prices were flat compared with September.

What it means

The October reading was the third straight month of faster factory-gate inflation and the steepest since June 2022, when the index rose 6.1%, according to the Seoul Economic Daily. On a monthly basis the PPI still rose 0.7%, though that was half a percentage point slower than in September. Much of the push is coming from abroad. The Seoul Economic Daily linked the jump to crude oil prices that have stayed high because of the war involving Iran, and NBS statistician Dong Lijuan pointed to a mix of imported inflation and domestic demand.

Consumer prices tell a softer story. Food fell 2.9% from a year earlier, with fresh vegetables down 16.9% and pork down 8.6%, while non-food prices rose 1.5%, Xinhua reported. Gasoline was the biggest single upward force, rising 22.4% and adding roughly 0.63 percentage points to the CPI. Demand linked to artificial intelligence and computing also showed up in household prices: data storage equipment cost 45.4% more than a year before, and computers 23% more. The headline slowdown was the first after two months of gains, CNBC said.

The key issue for investors is the gap of roughly five percentage points between the two measures, as investingLive noted. When costs rise much faster than the prices companies can charge consumers, businesses tend to absorb the difference, which eats into profit margins. Zhang Zhiwei, chief economist at Pinpoint Asset Management, told CNBC that strong overseas demand drove producer prices, while the property slump has kept spending at home weak and continues to weigh on household confidence and local government revenue.

Officials struck a calmer tone. NBS spokesperson Wang Guanhua said China's price gains remain relatively mild compared with the sharp increases seen in other major economies. Liu Fang, a researcher at the National Development and Reform Commission, said the gentle recovery in prices has helped company profits, noting that earnings at large industrial firms grew 15.5% in the first nine months, and forecast that prices will keep edging higher. The wider economy is mixed: third-quarter output grew 4.5% year on year, helped by exports, but consumption has been slow to recover.

The bull case

Officials argue that firmer prices are already lifting industrial profits, and growth in the third quarter beat expectations, with September retail sales also surprising on the upside, CNBC said. Softer consumer and core inflation also leave Beijing room to add support for domestic demand without worrying about an overheating economy. The CSI 300 index of mainland shares edged up 0.56% after the data came out.

The bear case

Much of the factory price surge reflects an energy shock rather than stronger demand, so it raises costs without lifting sales. With consumers spending cautiously and core inflation below 1%, manufacturers and retailers may struggle to pass those costs on, squeezing margins. Rising input prices could also limit how far policymakers are willing to ease. Zhang told CNBC he sees no clear sign yet that the property market has stabilized, which keeps a lid on household demand.