The producer price index — which measures the cost of goods sold to businesses — soared 10.7% in September from a year ago, according to government data released Thursday. That is the fastest increase since 1996, when the government began releasing such data, according to Eikon Refinitiv data.
Thursday’s data shows that the rising costs of raw materials are cutting aggressively into Chinese company profits, a problem that could force them to slow production or even shed workers. Some factories have reduced shifts because of power rationing.
The ongoing energy crunch
High inflation is also troublesome for China’s economy.
The country is already in the middle of an energy crunch that is denting factory output and leading to power cuts in some areas — a problem fueled by demand earlier this year for construction projects that need fossil fuel and are at odds with Beijing’s pursuit of ambitious targets to cut carbon emissions.
“The risk of stagflation is rising,” wrote Zhiwei Zhang, chief economist for Pinpoint Asset Management, in a note on Thursday. “The ambitious goal of carbon neutrality puts persistent pressure on commodity prices, which will be passed to downstream firms.”
Consumer inflation remains low. The consumer price index increased just 0.7% in September from a year earlier. But there are a few signs that producers are starting to pass along costs.
An expected slowdown
Thursday’s data came days before China is scheduled to release GDP figures for the third quarter, which are expected to show a slowdown in growth.
Elevated coal prices have led to widespread electricity shortages, forcing the government to ration electricity in 20 provinces during peak hours and some factories to suspend production. Those disruptions resulted in a sharp drop in industrial output last month.
Manufacturing activity was weak in September, “likely driven by energy constraints late in the month,” analysts at Goldman Sachs wrote in a Thursday research report. They expect GDP to have grown about 4.8% in the third quarter compared to a year earlier, a sharp slowdown from the second quarter’s 7.9% rise.
China’s economy is also contending with another problem: A debt crisis at embattled Chinese conglomerate Evergrande has triggered worries about contagion risks to the giant property sector and the broader economy.
Property, together with related industries, accounts for as much as 30% of the country’s GDP. A slowdown in the sector would have a significant impact on growth and pose risks to financial stability.