Reflationary trends in China may start to wane. The producer price index experienced a hike in March but stayed behind the February numbers. However, it has beaten the analyst estimated for the full year, reaching 7.6 percent against 7.5 percent. The consumer price index, on the other hand, registered marginal gains. According to the National Bureau of Statistics, gains in March were slightly better than February at 0.9 percent. In February, consumer price index rose by 0.8 percent.
Why Are Prices Rising?
Producer prices in China are rising because of heightened industrial activity. We must note that the commodity prices have also increased recently. China, along with many other economies, is finally coming out of deflationary times. The housing market is becoming more predictable and the monetary policy is also tightening. Add restricted borrowing to the mix and you see why China is finally moving towards inflation. However, we should not expect strong trends right now. In the upcoming quarters, the trends will remain moderate.
The moderate rise in producer’s inflation will continue till the first half of the year, but may fall off in the second. However, producers will have space to build up profits and reinvest their capital to maintain moderate growth rates and inflation. The producer’s inflation is likely to peak in June and enter a downward spiral later. This year, the PPI will rise by 5 percent. However, consumer price inflation will continue adding up throughout the year.
Good News for the Chinese Economy?
The world economy is stuck with tepid growth and inflation for years. Even China registered a growth of only 6.7 percent recently, which was its slowest ever in more than 2 decades. However, the last quarter of 2016 prove to be a savior for this large economy. Demand rose ahead of the Chinese New Year which helped in stabilizing the economy. Further, factory gate inflation is rising constantly, albeit at a slow pace. This rise is helping increase investor confidence, boosting business profits, and helping starving economic entities find new life.
However, inflation does not seem to a primary motivator for Chinese policy makers. They are still more inclined towards tightening monetary policy. The Chinese are notorious for keeping up with the numbers, often manipulating the figures to suit their interests. Therefore, they would want to showcase better economic growth, falling within their guidelines first. An increase in inflation would be a by-product of increased activity and spiking industrial production and not a direct interference by the authorities.