China's factory inflation hits record high in May

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China's factory inflation hits record high in May

China's rising commodity costs drove the factory inflation up to its highest level since 2008 in May, further adding to global price pressures.

The producer price index climbed 9% from a year earlier, following a 6.8% gain in April, the National Bureau of Statistics said Wednesday. The median prediction in a Bloomberg survey of economists was for a 8.5% increase. From a year ago, Consumer prices increased from 1.3% and surpassed an estimate of 1.6%.

Commodity prices have rallied this year as the global recovery persisted, pandemic supply shortages persisted and governments around the world pumped in record amounts of stimulus Chinese policy makers have taken targeted measures to restrict the supply of raw materials and crack down on speculation and hoarding, while also calling up their rhetoric in order to curb costs.

The effect of higher prices in metals has mainly been seen in downstream industries involved in the mining and processing of raw materials while price increases in upstream industries like furniture and textiles have been minimal according to an analysis by Bloomberg Economics.

The pass through from PPI to consumer prices has also been weakened, given that the link between the two is limited. Intense competition between smaller businesses, which is accelerated by the rise of e-commerce, and weak domestic demand means China's factories are absorbing higher input costs rather than passing them on to consumers at home.

Authorities have said that PPI will likely continue to climb through the second quarter before moderated in the second half of this year. The central bank is expected to avoid increasing interest rates in response to the inflation data but also keeping liquidity tightly balanced in the banking system, according to economists.

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