China's factory-gate prices surge, but CPI growth still modest

By Stella Qiu and Ryan Woo

BEIJING (Reuters) -China's factory gate prices rose at the fastest rate in three and a half years in April as the world's second-largest economy gathers momentum after strong first-quarter growth, but economists downplayed the risks to inflation.

Investors globally are increasingly worried that pandemic-driven stimulus measures could spark a rapid rise in inflation and force central banks to raise interest rates and take other tightening measures, potentially holding back economic recovery.

China's producer price index (PPI), a gauge of industrial profitability, rose 6.8% in April from a year earlier, the National Bureau of Statistics said, faster than a 6.5% rise tipped by a Reuters poll of analysts and a 4.4% rise in March.

However, the consumer price index (CPI) rose by a mild 0.9% on year, held down by weaker food prices, and analysts said the rising costs from soaring producer prices were unlikely to be fully passed on to consumers.

"We still expect much of the recent surge in upstream price pressure to prove transitory, with industrial metal prices likely to drop back later this year as a tighter policy stance weighs on construction activity," Capital Economics analysts said in a note.

"We don't think inflation will rise to the point where it triggers a major policy shift" by China's central bank, they added.

Chinese authorities have repeatedly said they will avoid sudden policy shifts that could derail economic recovery, but are slowly normalising policy and clamping down on property speculation in particular.

The sharp jump in producer prices included an 85.8% surge in oil and natural gas extraction from a year ago, while ferrous metals processing rose 30%, said Dong Lijuan, senior NBS statistician in a statement accompanying the data release.

Consumers could see some price rises ahead from a global chip shortage affecting goods such as home appliances, cars and computers, said Iris Pang, Greater China chief economist at ING.

"We believe that the chip price increase has already pushed up prices of fridges, washing machines, TVs, laptops and car prices in April, which increased 0.6%-1.0% month-on-month," she said.

CPI STILL MILD

April's 0.9% CPI increase was up on a 0.4% rise in March, driven mostly by gains in non-food prices as the services sector recovered. It missed analysts' expectations for a 1.0% rise.

Sheng Laiyun, a deputy director at NBS, said on Friday that China's full-year CPI is likely to be significantly below the official target of around 3%.

Sheng attributed China's likely muted inflation to currently slow core inflation, economic fundamentals where supply has outstripped demand, relatively restrained macropolicy support, recovering pork supply and a limited pass-through effect from PPI to CPI.

Food inflation remained weak. Prices dropped by 0.7% from a year earlier, unchanged from the previous month, weighed by falling pork prices as supply increased.

China's gross domestic product (GDP) expanded by a record 18.3% in annual terms in the first quarter as the country recovers from the devastating impact of COVID-19.

Many economists expect China's GDP growth to exceed 8% in 2021, although some warn that continuing global supply chain disruptions and higher comparison bases will sap some momentum in coming quarters.

(Reporting by Stella Qiu and Ryan Woo; Additional reporting by Min Zhang; writing by Se Young Lee; editing by Richard Pullin)