After re-entering positive territory early this year, China’s producer price inflation rose rapidly across H1, fueled by elevated cyclical commodity prices, heightened shipping costs, and recovering global demand. In contrast, China’s consumer price inflation remained relatively muted in H1. While this trend was due in part to food prices falling in the wake of the African Swine Fever, it also reflected sluggish household demand, which limited companies’ ability to pass price increases through to consumers.
Although China’s producer price inflation is likely to ease gradually in H2 due to commodity market shifts and domestic policy interventions (e.g., strategic stockpile releases, speculation targeting), price pressures on factories are likely to remain high. China’s consumer prices will also shift in H2, as their growth accelerates on the back of easing base effects. However, this shift will be muted by continued sluggish household demand, and the country’s consumer price inflation will come in below 2% for the full year.
Factories in China should expect input prices to remain elevated through the rest of this year, though they may see some relief, particularly in Q4. Unfortunately, with China’s consumer price inflation likely to be subdued during this time, companies’ capacity to drive price increases all the way down the supply chain to domestic end-consumers will be limited. With this in mind, multinationals in China aiming to protect their margins via price increases should focus their efforts on customers in Western markets (particularly the US), where reopening economies and strong growth should provide them with more flexibility.
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