China's factory inflation hits 26-year high as power crunch bites - Reuters

Birds fly over a closed steel factory where chimneys of another working factory are seen in the background, in Tangshan, Hebei province, China, February 27, 2016. REUTERS/Kim Kyung-Hoon/File Photo

• Oct PPI, CPI accelerate, rise faster than expected
• Chinese businesses face soaring materials costs
• Price pressures heighten 'stagflation' fears

BEIJING, Nov 10 (Reuters) - China's factory gate inflation hit a 26-year high in October as coal prices soared amid a power crunch in the country's industrial heartland, further squeezing profit margins for producers and heightening stagflation concerns.

The producer price index (PPI) climbed 13.5% from a year earlier, faster than the 10.7% rise in September, the National Bureau of Statistics (NBS) said in a statement.

It matched a pace not seen since July 1995 and was faster than the 12.4% forecast by analysts in a Reuters poll.

Consumer price rises also quickened, although at a slower pace than factory gate prices. The consumer price index (CPI) rose 1.5% in October year-on-year, compared with September's 0.7% rise.

The mounting price pressures complicate deliberations for the People's Bank of China, which may now be wary of injecting monetary stimulus too quickly amid concerns about fanning inflation, even as growth in the world's second-largest economy slows.

"We are concerned about the pass-through from producer prices to consumer prices," said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note.

Consumer prices will likely speed up in coming months as firms faced depleted inventories and are forced to pass higher costs onto customers, he added.

"The risk of stagflation continues to rise."

Slowing economic growth and soaring factory inflation have fuelled concerns over stagflation, which could mean China has to move cautiously on loosening monetary policy.

"Rising CPI inflation and elevated PPI inflation reduces the probability of a PBoC policy rate cut," said Ting Lu, Chief China Economist at Nomura.

POWER STING

Upstream industries drove factory gate price rises, with coal mining and washing prices surging 103.7% from a year earlier and prices in the oil and gas extraction industry rising 59.7%.

Restrictions on carbon emissions and soaring prices of coal, a key fuel for electricity generation, led to power rationing and production cuts in recent months, although coal prices have since fallen after government intervention.

"Factory gate inflation is probably close to a peak," said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note, citing coal price falls.

Several Chinese food giants have announced increases in retail prices in recent weeks, as rising production costs erode profit margins. Foshan Haitian Flavouring And Food (603288.SS), vinegar producer giant Jiangsu Hengshun (600305.SS) and frozen food firm Fujian Anjoy Foods (603345.SS) have all hike prices.

The PPI inched up 2.5% on a monthly basis, compared with the 1.2% uptick in September.

Core inflation, which strips out volatile food and energy prices, stood at 1.3% rise in October from the previous year, higher than the 1.2% uptick in September.

Reporting by Liangping Gao and Gabriel Crossley; Editing by Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.

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