NEWS

Threat of global inflation grows as prices increase in Chinese factories

Published on: 17th May 2021

The price of raw materials and goods leaving Chinese factories rose 6.8% in April, its fastest pace in more than three years.

A surge in demand for raw materials amid signs of a global recovery have led to rising commodity prices in the Far East. Last week, China released figures suggesting that the price of raw materials and goods leaving its factories rose at 6.8% year on year, its fastest pace of growth in more than three years.

For practically the whole of 2020, China’s producer price index (PPI) was in negative territory, as Covid suppressed global demand. As such, the recent rise is partly driven by the comparison last year. However, the increase in commodity prices is also being driven by increasingly voracious demand in China, combined the recovery of major economies across the globe.

China’s PPI index is made up of prices of consumer goods, along with the prices of raw materials and commodities. Global commodity prices collapsed last year in the early stages of the pandemic, but have subsequently rebounded. Of particular interest to the toy market, oil prices have recovered sharply from last year. It has been estimated that 70% of the April PPI increase was driven by commodities.

The big question now is whether higher commodity prices will feed through to consumer prices across the globe. On the positive side, China’s consumer price index was just 0.9% in April — its highest level in seven months, but a long way from a level that would generate immediate fears of broader inflation within China.

However, taken in conjunction with huge increases in shipping costs from China, any rise in the cost of raw materials – even a modest one – will place further pressure on suppliers’ cost base. In addition, shortages in certain areas, such as the chip shortage we highlighted several weeks ago, could potentially exacerbate an already fragile situation.

Recent data showed that external demand is significantly boosting China’s export business; Chinese exports increased by 32.3% year on year in April. Even when compared with April 2019, the rise was around 16%.

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