China Factory-Gate Inflation Hits Five-Year High

Chinese producer prices rose at their fastest pace for five years in November, Beijing said late Friday, fuelling hopes that the world’s factory can export inflation into a lackluster global economy.

The forecast-beating figures mark an acceleration from the previous two months after more than four years of plunging prices as the world’s number-two economy stabilizes. They also come a day after data showing a surprise rise in foreign trade and have led to suggestions the central bank should lift interest rates, Bloomberg reported.

The producer price index rose 3.3% year-on-year last month, the National Bureau of Statistics said, smashing estimates of 2.3% in a Bloomberg News survey. The consumer price index, a key gauge of retail inflation, rose 2.3%, slightly beating expectations of 2.2%.

“China has entered a new inflationary cycle,” Raymond Yeung at Australia & New Zealand Banking Group in Hong Kong, told Bloomberg News. “The next move of the People’s Bank of China should be an interest rate hike, not a cut.”

China is the world’s biggest trader in goods, and its performance affects partners from Australia to Zambia, many of which have been mired in tepid inflation for years, which has in turn caused a drag on the global economy. Chinese firms have been battered by falling prices for their goods in the face of chronic overcapacity and weak demand, putting a damper on growth in the country.

The economy expanded last year at its slowest rate in a quarter of a century as Beijing strives to effect a difficult transition from reliance on exports and state investment to an economy driven by consumers. Protracted falls in factory gate prices are a bad sign for industrial prospects and economic growth because they put off customers—who seek to delay purchases in anticipation of cheaper deals in the future—starving companies of business and funds.

ANZ analysts said the figures showed China had pulled out of years-long period of deflation thanks to rising commodity prices, and predicted that the producer prices would continue to edge up next year. The country is “now a source of global inflationary pressure”, Julian Evans-Pritchard of Capital Economics said in a note.

Loose credit and ample stimulus have stoked domestic demand, driving price increases in property and industrial commodities, he noted. The CPI rise was driven largely by an increase in prices for fresh vegetables, statisticians said, due in part to costs associated with greenhouse growing and a nationwide cold snap.