- DWS: "Producer prices in China could rise up to 8% in May".
- China is starting to export inflation to the rest of the world
Inflation is one of the hottest debates of the year. Prices measured by the CPI in year-on-year terms have reached 2% in the euro zone, while in the US it has exceeded 4%. Although these rates of change are already levels to be reckoned with when compared to recent years, 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 starting 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 goods made in China.
After years of exporting deflation (production costs and wages contained), China is beginning to suffer a notable increase in production costs. JP Morgan explains in a note to clients that this week they "expect China to publish the largest increase in producer prices since 2008". Higher costs in the world's factory will put upward pressure on inflation in China's big customers: Europe and the US.
"Inflation is on the rise around the world. However, the causes and implications vary from place to place. In China, the strong rebound in producer prices (PPIs) is making headlines: in April, prices rose by 6.8% year-on-year, up from a 3% drop a year earlier. And some leading indicators, such as the price components of the latest Purchasing Managers' Indices (PMI), suggest that the 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 financial firm DWS.
A problem for the world
The financial agency Bloomberg states that this price boom in China "could become a problem for the world". Beyond the price boom in the Asian giant, we must take into account the strength of the yuan, which has appreciated against the euro, but above all against the dollar. A stronger yuan and rising prices in China will mean an extra shot of inflation for the rest of the world.
"All else being equal, a stronger Chinese currency means a weaker U.S. dollar, with all that implies. More importantly, for now, this could portend a period in which China exports inflation to the rest of the world, just as it arguably exported deflation in the 1990s and 2000s," Bloomberg says.
The risk of global cost inflation will be the key issue for the coming months. In principle, this phenomenon should be transitory, as bottlenecks and shortages of certain inputs should disappear as supply adapts to demand, but especially as demand returns to normal (the reopening and covid has triggered the consumption of many technological goods which is generating an unprecedented shortage of semiconductor chips, for example). However, Bloomberg says that the risks are centered on the possibility that the bottlenecks are more than transitory.
For now, the factors that are most influencing prices and production costs are rising commodity and input prices that, in part, reflect strong demand and inventory replenishment linked to the economic recovery in the U.S. and other countries, DWS economists explain. "Supply bottlenecks are also pushing up the PPI. For example, in the case of copper, this base metal is mainly produced in South America and Africa, two regions still suffering from the ravages of the covid-19 pandemic and where vaccination has not made much progress."
However, other factors may be more enduring over time, 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 some intermediate products to reduce pollutant emissions. In turn, increased steel exports have led to price increases in the domestic market, as have speculative activities in the coal market," comments DWS.
On the other hand, if private oil companies continue not to move to initiate a new investment cycle, oil production could remain stagnant, leading to higher crude oil prices for some time, as is currently the case. Brent crude is now trading comfortably above $70 a barrel and could continue to rise.
Another factor that may be prolonged in the semiconductor chip crisis. The adaptation of this industry to a boom in demand is very slow because of the large capital requirements (both physical and economic) it needs to scale up its production. 5G networks and a much more digital post-covid economy may generate a higher structural demand for chips.
China is one of the world's largest consumers of chips. Although the Asian giant assembles and produces a large number of advanced and non-advanced electronic devices, it is not able to produce enough chips for all that production, so it has to import them from Taiwan and South Korea. The shortage of semiconductors will lead to a boom in their prices, which in turn will make production costs in China even more expensive, exporting more inflation to the rest of the world.
elEconomista.es
