China's factory-gate prices continued to move upward in October, posting the biggest increase in more than four years amid surging global energy prices and a boom in artificial intelligence investment worldwide, even as consumer prices remained fairly stable, analysts said.
The gap between the two inflation indicators, however, widened for a second consecutive month — a trend analysts said could prolong the squeeze on profits at midstream and downstream enterprises, strengthening the case for policy measures to shore up a still-tepid recovery in demand.
The country's producer price index, which tracks factory-gate prices, climbed 5.7 percent year-on-year in October, accelerating from a 5 percent rise in September, the National Bureau of Statistics said on Monday. The latest reading marks the third straight month of acceleration and the highest rate since June 2022.
According to Su Jian, director of Peking University's National Center for Economic Research, a surge in global energy prices fueled by the conflict in the Middle East is pushing up prices of chemicals and related industrial goods in China.
Dong Lijuan, a statistician with the NBS, said that six energy-related industries, including oil and gas extraction and petroleum refining, accounted for more than 80 percent of the PPI's month-on-month rise, with stronger fuel demand ahead of winter providing a further lift.
Feng Lin, executive director of research at Orient Golden Credit Rating International, said, "The global AI investment boom has also increased prices of electronic components and devices sharply this year, a trend that continued to push up the PPI in October."
By contrast, consumer inflation has remained moderate. The consumer price index rose 0.7 percent year-on-year in October, easing from 0.9 percent in September, NBS data showed.
Gasoline prices climbed 22.4 percent from a year earlier, while food prices fell 2.9 percent, with the decline widening by 1.2 percentage points from September.
Feng said lower food prices helped anchor consumer prices, offsetting much of the upward pressure from higher gasoline prices. "Consumer inflation is likely to remain mild through year-end," she added.
With consumer inflation remaining subdued even as factory-gate price increases gathered pace, the gap between the two widened to 5 percentage points in October from 4.1 points in September. The divergence indicates a slow recovery in domestic demand and continued pressure on downstream consumer goods producers, analysts said.
"Price increases are being driven more by higher costs than by stronger demand," said Lou Feipeng, a researcher at Postal Savings Bank of China. Higher prices are yet to translate fully into stronger corporate earnings and household incomes, he said.
To help shore up demand, policymakers have room to maintain a "moderately loose" monetary policy stance, said Feng of Orient Golden Credit Rating International, citing average CPI growth of 0.9 percent in the first 10 months, which is below this year's official target of around 2 percent.
Lou of Postal Savings Bank of China said that subdued consumer inflation and relatively high real interest rates provide room for rate cuts to lower financing costs and shore up domestic demand. Reductions in the reserve requirement ratios of banks could also release liquidity to support government bond issuance, he added.
However, the scope for rate cuts would be constrained by banks' already narrow net interest margins, Lou said, adding that further monetary easing is likely to be modest and targeted.
