China March Inflation: A Sign of the Times?

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As we head into earnings season, there are some key Chinese data points we should pay attention to. Tomorrow’s CPI and factory gate prices, and then next Friday’s GDP. And this isn’t just because China is the world’s second largest economy.

China has managed to, officially, keep the spread of Covid to a minimum, and has been lockdown-free during the winter. We could see their economic data as an indicator of what we might expect for the rest of the world recovering from Covid. This is particularly true on the inflation front.

Where are prices going?

If we understand what will happen to inflation, we can expect where commodities, stocks and currencies will be heading in the next few months. Even a bit of data can give us some useful insight into planning investments and project market evolution.

As demand returns, we would expect extra stress on production. China, being the manufacturing center of the world, is likely to see that pressure of demand reflected in their economic numbers. Additionally, there is a chain effect starting in China, were increased production costs will likely first manifest, and then “trickle down” to retailers in a few months’ time.

The headline data isn’t necessarily the most important

This is why we want to pay attention to the often ignored PPI figures. Producer Price Index measures how much products cost as they are leaving the factory, and can be an important indicator of future inflation. They might not cause an immediate reaction in the market on release, but as the trend filters through the markets, we could see some moves in broader asset classes.

Data projects that the China March PPI will accelerate to 2.7% growth from 1.7% growth in the prior month. Producer prices have been climbing since November of last year. Given the average shipping time of 30 days between China and the US, and around 45 days to Europe, next month we could see the increased cost of products reflected on shelves across the world. Some companies might already be raising prices in anticipation.

And what about the other data?

There is some flexibility between the increase of production cost and the price of products on the shelf. Particularly in an environment of lower demand, businesses might choose to take a smaller margin in an effort to hold on to market share. That doesn’t mean the inflationary pressure goes away. Usually it just means that it’s delayed.

This is why we should pay close attention to reports from major retailers during the coming earnings season, looking at their gross margins. If major retailers report smaller gross margins, it might indicate that they are taking up the cost of increased production. And hence, would be expected to push prices higher when the markets recover.

Chinese March CPI is expected to come in at -0.1% compared to 0.6% in the prior month.

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