Consumer prices in China hit a six-month high as Covid prompts residents to stock up on food

Fresh vegetable prices rose 24% year-on-year in April as consumers stocked up to prepare for possible stay-at-home orders. Pictured is a delivery driver from Alibaba’s Hema Fresh supermarket in Beijing on May 10, 2022.

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BEIJING — Consumer and producer prices in China rose more than expected in April, according to National Bureau of Statistics data released Wednesday.

The consumer price index rose 2.1% last month from a year ago, boosted by soaring costs for energy and fresh vegetables. The reading beat expectations of a 1.8% rise predicted by a Reuters poll.

The April figure was also the highest since November’s print of 2.3% and well above the 18-month average of 0.9% consumer price inflation. China’s official CPI target for 2022 is “around 3%”.

“The main driver was higher food prices due to higher transport costs and demand for restocking due to tighter Covid restrictions,” Goldman Sachs analysts said in a report on Wednesday.

“Year-on-year, we expect CPI inflation to rise and PPI inflation to fall on base effects,” the report said. “Sequentially, CPI inflation may moderate in the near term as inflationary food price pressures may ease as the Covid situation improves in China.”

Since March, mainland China has tightened travel restrictions and imposed stay-at-home orders in many parts of cities to contain the country’s worst Covid outbreak since early 2020. The controls have prevented many factories from producing at full capacity or to move goods between suppliers and customers.

Fresh vegetable prices rose 24% year-on-year in April, while fresh fruit prices rose 14.1% during this period. Pork prices, a major contributor to China’s CPI, posted a relatively rare 1.5% increase from the previous month for a more moderate 33.3% year-on-year decline.

Transportation fuel prices climbed 28.4% from a year earlier, reflecting recent spikes in oil and commodity prices.

Sluggish consumer demand

However, the rise in the consumer price index in China does not mean that locals are facing the same pressure as Americans.

Consumer prices in the United States have risen the most since the early 1980s, even excluding food and energy. The April figure due out later on Wednesday is expected to remain close to the 8.5% increase, the highest in decades, seen in March.

In China, excluding food and energy prices, the consumer price index edged up 0.9% in April from a year ago.

Looking further ahead, analysts warn that overall consumer demand in China remains depressed due to uncertainty over future incomes.

Some companies have even reduced their prices to attract buyers.

The Caixin Services PMI for April – a monthly sentiment survey – found companies were cutting prices at the fastest rate since May 2020, with “a number of companies lowering fees in order to attract new business amid sluggish demand,” according to a statement.

A similar survey of manufacturers found that despite a sharp rise in production costs, selling prices rose only modestly as companies struggled to stay competitive and attract new business.

Factory costs remain high

In April, China’s producer price index moderated for a fourth consecutive month, rising 8% year-on-year. It was still above Reuters forecast for a 7.7% increase.

Within the PPI, purchase prices have risen much faster than so-called ex-factory prices – the price of goods sold by factories for further manufacture or sale to distributors.

This indicates that cost pressures are unevenly distributed across industries, said Bruce Pang, head of macroeconomic and strategic research at China Renaissance.

He said that means different companies will face different kinds of impact on their profit margins.

There is an “urgent need” for monetary and fiscal policy to provide targeted support to businesses badly hit by the pandemic, Pang said in Chinese, translated by CNBC.

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China’s central bank and other authorities have announced a number of measures to support growth in recent weeks, although the scale of these measures has generally disappointed markets.

“Covid lockdowns have eroded the effectiveness of policy easing and reduced demand more than supply,” Morgan Stanley’s China chief economist Robin Xing and a team said Tuesday in a note.

In late April, the company cut its GDP target for China to 4.2% based on expectations that Covid controls will disrupt supply chains will last longer. This is down from the previous forecast of 4.6%.

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