- DWS: "Production prices in China could rise by up to 8% in May"
- China is beginning to export inflation to the rest of the world
Inflation is one of the hottest topics of the year. Prices measured by the CPI on a year-over-year basis have reached 2% in the eurozone, while in the U.S. they have exceeded 4%. Although these rates of change are already significant when compared to recent years, the CPI is expected to continue rising for much of 2021 for several reasons. One of these is that China, the world’s factory, is also beginning to feel inflationary pressures in its own economy, with higher production costs that will start to be passed on to the rest of the world through all goodsmade in China.
After years of exporting deflation (through contained production costs and wages), China is beginning to experience a significant increase in production costs. In a note to clients, JPMorgan explains that this week “they expect China to report the largest increase in producer prices since 2008.” Higher costs in the“world’s factory” will put upward pressure on inflation in China’s major markets: Europe and the U.S.
"Inflation is rising around the world. However, the causes and implications vary from place to place. In China, the sharp surge in producer prices (PPI) is making headlines: in April, prices rose 6.8% year-over-year, compared with a 3% decline a year earlier. And some leading indicators, such as the price components of the most recent Purchasing Managers’ Index (PMI) readings, suggest thatthe increases have not yet peaked. Against this backdrop, producer price inflation for May—to be released on June 9—could exceed 8%,” say economists at the financial firm DWS.
A Problem for the World
The financial news agencyBloombergreports that this surge in prices in China "could become a problem for the world." Beyond the surge in prices in the Asian giant, we must also consider the strength of the yuan, which has appreciated against the euro, but especially against the dollar. A stronger yuan and rising prices in China will provide an extra boost to inflation for the rest of the world.
"All other things being equal, a stronger Chinese currency means a weaker U.S. dollar, with all that entails. More importantly, for now, this could herald a period in which China exports inflation to the rest of the world, just as it could be said to have exported deflation in the 1990s and 2000s,"Bloomberg reports.
The risk of widespread cost inflation will be the key issue in the coming months. In principle, this phenomenon should be temporary, since bottlenecks and shortages of certain inputs should gradually disappear as supply adapts to demand—but especially as demand returns to normal (the reopening and the pandemic have driven up consumption of many tech products, leading to an unprecedented shortage of semiconductor chips, for example). However, Bloomberg reports that the risks center on the possibility that these bottlenecks may be more than just temporary.
For now, the factors having the greatest impact on prices and production costs are rising raw material and input prices, which partly reflect strong demand and inventory restocking linked to the economic recovery in the U.S. and other countries, according to DWS economists. “The supply bottlenecks we’re seeing are also pushing the PPI higher. For example, in the case of copper, this base metal is produced mainly in South America and Africa—two regions that are still suffering the ravages of the COVID-19 pandemic and where vaccination efforts have not made much progress."
However, other factors may have a more lasting impact, such as everything related to the energy transition. "Other reasons can be attributed specifically to China. For example, the country’s authorities have restricted the capacity and production of certain intermediate products to reduce pollutant emissions. At the same time, the increase in steel exports has led to price hikes in the domestic market, as have speculative activities in the coal market,” DWS notes.
On the other hand, if private oil companies continue to sit on the sidelines and fail to launch a new investment cycle, oil production could stagnate, which would lead to higher crude oil prices for some time, as is currently the case. A barrel of Brent is now trading well above $70 and could continue to rise.
Another factor that could prolong the semiconductor chip crisis. This industry’s ability to adapt to a surge in demand is very slow due to the significant amount of capital (both physical and financial) required to expand production. 5G networks and a much more digital post-COVID economy could generate higher structural demand for chips.
China is one of the world's largest consumers of chips. Although the Asian giant assembles and manufactures a large number of both advanced and non-advanced electronic devices, it is unable to produce enough chips to meet the demands of all that production, so it has to import them from Taiwan and South Korea. The semiconductor shortage will lead to a surge in prices, which in turn will further drive up production costs in China, exporting more inflation to the rest of the world.
elEconomista.es
