China's two inflations: factory prices up 5.7%, shop prices up 0.7%

What happened

Prices charged by Chinese factories, the producer price index, rose 5.7% in October from a year earlier, the National Bureau of Statistics said on 9 November. That was above the 5.3% forecast and up from 5.0% in September, the fastest rise in more than four years. On the month, they rose 0.7%.

Consumer prices told a different story. They rose 0.7% on the year, down from 0.9% in September and below the 0.8% expected, and were unchanged from September. Core consumer inflation, which leaves out food and energy, was 1.0% in September.

Why the two measures have split apart

Producer prices follow costs. Oil, coal and metals have all become more expensive this year, partly because of the war involving Iran and partly because of supply problems such as China's copper shortage (our story). In September, prices in mining rose 25% on the year and in non-ferrous metal smelting 21%.

Consumer prices follow demand. If households are confident, shops and makers of consumer goods can pass higher costs on. In China they are not: retail sales grew just 1.1% in January–September, China's National Development and Reform Commission said on 7 November, describing a mismatch of "strong supply and weak demand", Bloomberg reported. Consumer goods prices at the factory gate actually fell slightly in September.

What it means

When costs rise faster than selling prices, the difference comes out of margins. Factories in the middle of the supply chain, buying expensive raw materials and selling to cautious consumers, are squeezed. That helps explain why the two factory surveys sent mixed signals last week (our story), and why firms were cutting their own selling prices to win orders.

For the rest of the world, the message is two-sided. Rising Chinese factory prices could eventually feed into the cost of goods it exports. But as long as demand at home stays weak, firms have strong reasons to keep export prices low.

Where it sits in the chain

This is Link 1, inflation, with a twist: where most economies face cost and demand pressures together, China has cost pressure without the demand to pass it on, which is a problem for growth (Link 5) more than for inflation.

What to watch

• China's retail sales and industrial output for October, due mid-November.
• Any new support for household spending from Beijing.
• Whether producer prices keep rising if oil stays below $100.