The central bank sends a reassuring message about inflation almost daily: “It is a temporary phenomenon.” They may be correct, but temporary or not, prices are ‘heating up’ much more than anticipated. Each new CPI data exceeds forecasts, while production costs are also skyrocketing more than expected, as seen on Wednesday in China’s industrial production index . This rise in costs in the world factory will have its impact on the rest of the powers.
The prices of industrial production in China have registered a year-on-year rise of 9% , the highest since September 2008, after the rise of 6.8% observed the previous month, according to data from the National Statistical Office (ONE).
This increase in producer prices has exceeded market expectations, whose consensus spoke of an increase of 8 or 8.5% , an increase that was already anticipated as dangerous for the evolution of inflation.
However, the reassuring data of the day is that, for now, the strong increase in wholesale inflation has not been reflected at the moment in China’s consumer price index (CPI), which rose 1.3% year-on-year in May , compared to 0.9% in the previous month. In the US, the CPI is already up 4.2%, while in Europe it stands at 2%. However, the models used by financial institutions warn that inflation has not yet peaked and that it will do so sometime in 2021.
Producer prices rise in China by 9%
It appears that companies, at least in the domestic market, are adjusting margins before passing more of their cost increases to consumers. But if costs continue to rise, this behavior will be unsustainable over time, so that either producer prices begin to moderate or companies will have to charge consumers a greater part of their costs.
In principle, the rise in industrial prices could be close to peaking. China is implementing measures to control the rise of raw materials over which it has some control. “Producer price inflation is probably near its peak,” says Julia Evans-Pritchard, an analyst at Capital Economics, for whom base effects will be less favorable starting this month.
Oil gets more expensive
However, oil is escaping into the hands of the ‘Asian giant’ and this raw material is rising sharply. Brent oil has already passed $ 72 a barrel. This raw material continues to drive prices almost everywhere in the world, since it not only affects production costs, but also directly impacts the CPI through energy prices (gasoline).
On the other hand, coal seems to be reborn, albeit for a short time. “The situation has worsened even more in the coal market: last Thursday, the price of the future of the previous month in the ICE rose above 100 dollars a ton for the first time since October 2018, now it reaches 106 dollars, the highest level since January 2012 “, they explain from Commerzbank.
This is due to a combination of several factors: demand is high in China, the largest consumer, because the economy is doing well and a hot summer is coming after a very cold winter. At the same time, Chinese production is reeling as safety controls are being tightened after a series of fatal accidents at the country’s mines. Demand is also high in Japan and South Korea, which are the main importers, while Indonesia, the main exporter, was experiencing production problems as a result of the heavy rains.
The risk of global cost inflation will be the key issue for the coming months. In principle, this phenomenon should be transitory, since bottlenecks and the scarcity of certain inputs should disappear as supply adapts to demand, but especially as demand returns to normal (the reopening and the covid has triggered the consumption of many technological goods that is generating an unprecedented shortage of semiconductor chips, for example). However, from the financial agency Bloomberg they assure that the risks focus on the possibility that the bottlenecks are more than transitory.