CHINA> National
Fuel prices raise PPI to 12-year high
By Wang Xu (China Daily)
Updated: 2008-08-12 06:40

Rising energy prices pushed up producer price index (PPI) in July to 10 percent year-on-year, the highest since 1996 when data were first recorded.

The new PPI, which rose 8.8 percent in June, has continued its spiraling ascent since last October, according to the National Bureau of Statistics.

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The PPI, the main gauge of factory gate inflation, is likely to further squeeze the profit margin of domestic enterprises, already struggling to cope with a global slowdown, analysts said.

The PPI is usually seen as a leading indicator of consumer inflation because producers pass on the rising costs onto consumers in six months or so.

But despite the jump in PPI in July, prices of consumer goods rose only 4.6 percent year-on-year, the least in six months. Consumer prices rose 7.1 percent in June, down from 8.7 percent in February.

“The main culprit (for the PPI rise) was the fuel price hike in June,” Citigroup analyst Ken Peng said. “It was responsible for most of the acceleration … (because) non-fuel prices remained fairly stable”.

The National Development Reform Commission, the country’s top planning body, increased petrol and diesel prices by more than 12 percent on June 20, and electricity tariff on July 1.

But the increases are largely seen as inadequate for energy producers to cope with the rising costs. For example, coal prices have more than doubled in two years and oil prices rose to a record $140-plus a barrel in July.

So “we expect another adjustment in energy prices after the Olympics,” Peng said.

Loss-making energy producers have been seeking a further increase in prices, though the government has managed to hold them down for public utilities to curb consumer inflation.

“The PPI may have peaked in July,” Lehman Brothers’ economist Sun Mingchun said. “The recent fall in crude and other commodity prices should start easing pressure on the PPI soon.”

The price of crude fell below $115 a barrel on August 8, the first time since May.

“The rising PPI is putting more pressure on profit margins than on the consumer price index,” Sun said. There is overcapacity in consumer-related manufacturing sectors, which account for a significant part of the country’s massive exports.

Yet the weakening overseas demand will force exporters to seek new buyers in the already crowded domestic market, making it difficult for them to pass on the rising production costs to consumers.

The rise in the PPI isn’t likely to flow to consumer prices “soon’’ because of the extremely competitive market for goods, said Zhang Liqun, a senior researcher at the State Council’s Development Research Center. “The key to curb PPI growth is to help local enterprises absorb the rising costs by improving the business environment.”

China raised the lending quotas for banks last month, and jacked up tax rebates for textiles and garments exporters, too. Analysts said the government could take more steps in the coming months to cope with an abrupt economic slowdown.