The producer price index – which measures the cost of goods sold to businesses — soared 10.7% in September from one year ago, according to government data released Thursday. But this is the fastest increase since 1996, when government began releasing such data according to Eikon Refinitiv data.
Thursday's data shows that the rising costs of raw materials are cutting aggressively into Chinese company profits, a problem that could force them to slow production or even shed workers. Some factories have reduced shifts because of power rationing.
In the United States and Europe, inflation is running at 13 year highs. China, which has close trading ties with Germany, see inflation hit a 29 - year peak last month. High inflation is also troublesome for China's economy. The country is already in the middle of an energy crunch that is denting factory output and leading to power cuts in some areas — a problem fueled by demand earlier this year for construction projects that require fossil fuel and are at odds with Beijing's ambitious targets for carbon emissions. The risk of stagflation is rising, wrote Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note on Thursday. The ambitious goal of carbon neutrality puts persistent pressure on commodity prices, which will be passed to downstream firms. Consumer inflation remains low. The consumer price index increased from one month earlier to just 0.7% in September. Here are a few signs that producers are starting to pass on costs. At least 13 publicly traded firms, including a major food and beverage makers, raised their prices this year due to rising costs, according to a report in the state-owned China Securities Journal, an official state-owned newspaper affiliated with Xinhua, the country's official press agency. Thursday's data came days before China is expected to release GDP figures for the third quarter, which are expected to show a slowdown in growth. Several economists have revised their forecasts for China since the country's energy crunch has worsened. The price of coal – China's main energy source — rocketed from record highs this week as heavy rainfall and flooding dealt a blow to two major mining regions. Elevated coal prices have led to widespread electricity shortages, forcing the government to ration electricity in 20 provinces during peak hours and some factories to stop production. These disruptions resulted in a sharp drop in industrial output last month. Manufacturing activity was weak in September, likely driven by energy constraints late in the month, analysts from Goldman Sachs wrote in a research report on Thursday. The Economists expect GDP to have grown about 4.8% in the second quarter compared to one year earlier, a sharp decrease from the first quarter's 7.9% rise. China's economy is also fighting another problem: A debt crisis at embattled Chinese conglomerate Evergrande has triggered worries about contagion risks to the giant property sector and the broader economy. Affiliation of property and related industries accounts for as much as 30% of the country's GDP. A slowdown in the sector would have a significant effect on growth and pose risk to financial stability. The potentially slower economic slowdown, driven by the anticipated energy shortage and the contagion effect owing to a potential Evergrande default, will require further easing of monetary policy, analysts at Citi wrote in a research note on Wednesday. They've cut their forecast of China's annual GDP growth to 8.2% from 8.7% due to the Delta outbreak, and a recent wave of regulatory actions on private enterprise.