Costs for Chinese consumers are likely not to experience a surge despite a recent increase in producer prices in the country, according to JPMorgan Private Bank’s Alex Wolf.
“We don’t see (producer inflation) really going into consumer prices. They’ve risen a bit, but we don’t see much of a further rise in consumer prices that would force the (People’s Bank of China) to act in any way,” said Wolf, who is head of investment strategy for Asia at the firm.
He said that while there has likely been a peak already for producer inflation, in some cases consumer prices also appear to have peaked.
Profits for manufacturers of China have been eroded because of a soaring production costs for country’s manufacturers primarily because of a surge commodity prices. There was a 36.4 per cent year on year growth in May of profits at China’s industrial firms which was slower than the 57 per cent profits at China’s industrial firms, showed official data released over the weekend.
On the other hand, a 9 per cent year on year growth in China’s producer price index in May was reported in data released in early June. That rate of growth was the fastest since 2008. The data also showed that there was a 1.3 per cent year on year growth in the consumer price May. The gap between the speed of growth of producer prices and consumer prices in May was also a record for the Chinese economy.
“There’s not a very clear relationship between producer prices and consumer prices historically,” Wolf said.
“You’ve only seen a few instances where high producer prices do trickle down to consumer prices,” he said. “Producer prices are almost entirely driven by commodity prices.”
He added that “the only time” historically that producer inflation has trickled down into consumer prices is “when there’s really strong consumer demand” which is a condition that is currently seemingly impossible given the slow recovery of retail sales in China.
(Adapted from CNBC.com)